Does the Behavioral Theory of the Firm apply to Governmental and Public Sector Organizations?

Related Research Article

Hong, S. (2018). A behavioral model of public organizations: Bounded rationality, performance feedback, and negativity bias. Journal of Public Administration Research and Theory, 29(1), 1-17.


How does a governmental or public sector organization effectively track performance management is a question that has perplexed many. After all, given the impact of public organizations on the lives of citizens this is an important area to monitor.

For decades, researchers in organizational behavior have been influenced by the findings of Cyert and March in their landmark 1963 publication, A Behavioral Theory of the Firm. The book’s core idea is that past performance of an organization shapes its behavior and impacts its future.

However, I have always felt that the public sector is not well represented in Cyert & March’s book as the data for the same was derived from private companies. With this study, I aimed at filling the gap by analyzing data from 116 South Korean public agencies, between 2014-16 studying Korean public agencies’ responses to their annual performance feedback

South Korean public organizations are subject to annual evaluations scored on a continuous, numerical scale. The scores are converted to a simpler scale of A, B, C, D, and E. Managers responsible for these agencies have a stake in their organizations’ performance grades. Grades of A, B, or C carry a varying degree of financial awards. Managers with D and E grades face possible negative sanctions.

In my study, published in the Journal of Public Administration Research and Theory I show that the behavioral theory of the firm applies to the public sector organizations. As the Carnegie school scholars argue, “[I]ndividuals do not ‘maximize’ but rather ‘satisfice,' as they are boundedly rational and try to find a course of action, which satisfies or exceeds a set of minimal acceptability criteria. “

Thus, managers are said to “satisfice,” rather than maximize. Researchers distinguish between an organization’s “historical aspiration,” as measured by past performance, and its “social aspiration,” which is derived from performance comparisons with similar organizations; when performance falls below either of the two aspirational levels, a problem is perceived and a search for solutions initiated.

I propose a model suggesting that an organization’s aspirational level will respond to performance feedback in accordance with its relation to its aspirations. With performance below its social aspiration, an organization is likely to be motivated to improve its performance and respond positively to performance feedback. However, once the performance-social aspirational gap is closed, the organization’s attention will revert to its historical aspiration, known as the “aspiration switching hypothesis.”

I find that social aspiration has a far greater relevance than historical aspiration. Further, the impact of negative internal sanctions appears to be less than expected and intrinsic factors in a given organization, along with publicly perceived negativity bias, have greater explanatory effects. Social aspiration and negativity bias can be conceived as peer pressure and external criticism, respectively, and are likely to have stronger impacts on performance improvement.