Rational and reasonable microfoundations of markets and institutions

This paper proposes that individual rational behavior (from neoclassical economics) and collective reasonable behavior (from jurisprudence) serve as the microfoundations of markets and institutions, respectively. We propose that incorporating a collective standard of reasonable behavior can significantly enrich mainstream theories of organization and management that are based largely on a model of individual rational behavior. We examine this proposition in the cases of behavioral theory of the firm, transaction cost economics, organizational institutional theory, and population ecology theory. In each case we find that important new advances can be made in these maturing theories by incorporating both rational and reasonable models of behavior.