Much of society's resource allocation takes place within organizations. With some important exceptions such as agriculture, organizations are the prevailing structure where there is profit-oriented productive activity, both in free market economies and in economies that are controlled in varying degrees; in most industries it has become unusual for individual producers to deal autonomously with markets. Virtually all of every economy's governmental and private nonprofit enterprises take place within organizations. Consequently, when economic analysis of exchanges among organizations is not concerned with economic behavior within organizations, it overlooks a large part of society's resource allocation.

If employees competed on the basis of the external market forces of demands for the organization's outputs and supplies of its inputs, neglect of resource allocation within organizations could be unimportant. However, if economic forces that act independently of these external forces are generated within the organization, neglect of economic behavior within organizations could result in incomplete and perhaps incorrect conclusions about resource allocation.

This book presents a positive economic theory of resource allocation within organizations. Based on recent developments in the economic theory of information, the theory extends to individuals within an organization the received theory of firm and industry supply. In the theory presented here, information costs lead employers to delegate discretion over an organization's resource allocation to employees. Employees take advantage of this discretion by pursuing their own objectives at the expense of their employers' objectives.