Group Size

David C. Rose

in The Moral Foundation of Economic Behavior

Published in print November 2011 | ISBN: 9780199781744
Published online January 2012 | e-ISBN: 9780199919116 | DOI:
Group Size

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In this chapter the benefits and costs of group size are discussed to lay the groundwork for establishing later how group size affects moral decision making. The gains from specialization are shown to rise with the scale of production. But it is also shown that the cost of group size increases because the problem of opportunism is worsened. This is because of the strengthening of commons dilemma incentives and greater localization of knowledge. Friedrich Hayek explained how market prices alleviate the problem of local knowledge across society, but Ronald Coase’s work shows why this mechanism will not work within firms. To efficiently employ local knowledge, firm owners must trust that those who possess it won’t engage in opportunism. Echoing Robert Frank, it is argued that since in many cases detecting opportunism is impossible (golden opportunities), prudential restraint is insufficient – only internalized (moral) restraint can work.

Keywords: Coase, Ronald; commons dilemma; Frank, Robert; golden opportunities; Hayek, Friedrich; local knowledge; prudential restraint; relational contracts

Chapter.  9587 words. 

Subjects: Economics

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