Coordination

Three Modes of Coordination

Governance theory distinguishes between three basic forms, or modes, of coordination: markets, hierarchies, and networks (sometimes also referred to as communities). There are some fundamental differences in how these modes of coordination work. The mechanism through which markets function is price—it balances between supply and demand and between sellers and buyers. Hierarchies function because of command and control—it links subordinates and superiors. Networks, on the other hand, rely on trust—they connect members that do not have a clearly defined relationship and may not even have a direct incentive to cooperate. The principles underlying coordination are different as well: In hierarchies, it is centralized authority; in markets, it is dispersed competition; and in networks, it is spontaneous solidarity.

The analytic distinction between the different modes of coordinating actors and resources is as follows: In a market, the actions of competitors are supposed to be independent because no one, singular action can have a traceable effect. In a hierarchy, on the other hand, the actors are bound by hierarchical coordination that makes their choices asymmetrically predictable, depending on the structure of legitimate authority and coercive capability. In a network, actor preferences and choices are interdependent, based on shared norms and jointly produced outcomes.

The first mode, coordination by way of markets and price, is the most frequent coordinating mechanism among private actors—between two individuals, between consumers and producers, and within companies and firms. Economists have long examined coordination through markets, from Adam Smith's eighteenth-century writings on corporate self-interest, to rational actor assumptions, to transaction cost models. But markets are just as important for the functioning of public agencies and governments. In effect, markets and prices have a coordinating effect whenever resources are allocated and whenever the conditions for this exchange are negotiable. The resources can be people, goods, or information, and the costs of exchange can be measured both in monetary and nonmonetary terms.

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