Organizational economics with cognitive costs

Organizational economics has advanced along two parallel tracks, one concerned with motivating agents with diverging objectives, the other - less developed - with coordinating agents with cognitive limits. This survey focuses on the second strand and on attempts to bring the two strands together. Organizations are viewed as responses to the cognitive costs faced by their (potential) members. We review existing approaches such as team theory, hierarchies of processors, organizational languages and knowledge hierarchies and we argue that they can help us address an array of important organizational issues. We also review recent developments in the application of these ideas: exploiting complexity measures, combining team theory and contract theory, applying organization theories in labor economics, and using these theories to interpret the wealth of activity data that is becoming available.