Rational Irrationality The making of property decisions in firms as a part of resource allocation processes- A Korean Example A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Hyemi Hwang Faculty of Built Environment University of New South Wales Sydney, Australia August 2011 Originality Statement I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgment is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project’s design and conception or in style, presentation and linguistic expression is acknowledged. Signed 03. 01. 2012 Date Copyright Statement ‘I hereby grant the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or part in the University libraries in all forms of media, now or here after known, subject to the provisions of the Copyright Act 1968. I retain all proprietary rights, such as patent rights. I also retain the right to use in future works (such as articles or books) all or part of this thesis or dissertation. I also authorise University Microfilms to use the 350 word abstract of my thesis in Dissertation Abstract International (this is applicable to doctoral theses only). I have either used no substantial portions of copyright material in my thesis or I have obtained permission to use copyright material; where permission has not been granted I have applied/will apply for a partial restriction of the digital copy of my thesis or dissertation.' Signed Date 03. 01. 2012 Authenticity Statement ‘I certify that the Library deposit digital copy is a direct equivalent of the final officially approved version of my thesis. No emendation of content has occurred and if there are any minor variations in formatting, they are the result of the conversion to digital format.’ Signed Date 03. 01. 2012 Abstract According to the profit maximising assumption and neoclassic economics view of the behaviour of the firm, no firm is expected to behave differently in the market or it will be forced out of the market by incurring higher costs than the competitors. This research aims to investigate how property decisions as a part of resource allocation processes can be understood away from seemingly unrealistic and restrictive view of neoclassical economic theory of the nature of the firm and what motivates firms to behave in such ways that are observed in property markets. By internalising incurring transaction costs, accepting the bounded rationality of people involved in property decision-making and recognising asset specificity, what a firm achieves is a new set of motivational assumptions which are distinguished from the theory of neoclassical economics on the nature of the firm. This new set of behavioural assumptions, derived from institutional economics, provides a little more realism to understanding the nature of the firm. It is also expected to broaden microeconomics approach into property decision making behaviours. Questionnaires given to asset and property managers in property markets in Korea for the interfirm- level behaviour of firms and interviews with employees in corporations in Korea provided insights into how property decisions are made as a part of resource allocation processes and the past experiences of firms in property markets for both an examination of intra- and interfirm-level behaviour. The aim of the research is achieved with illustrating of a theoretical property decision mechanism for a firm. By synthesising a theoretical framework of assumptions of firms’ behaviour and the results from the analysis, the theoretical mechanism will be formulated and presented as a two parts algorithm illustrating how property decisions are made internally and consequently in the property markets. Non-monetary values of property, which include values of property ownership and attributed values of property, were identified to motivate firms to take one of the proposed initial positions. Inefficiency in the property market often forces firms to reposition themselves in the market. The culture which is formed by the authority figures in the corporate structure, also affected property decisions in the property market. I Acknowledgements It was a cold, wet day in June, gloomy and desperate, just like how I felt, and my supervisor asked me, “Are you looking for a supervisor?” on first seeing me. That was exactly what I wanted, what I have got and more. I was just determined enough to make my supervisor, Dr Göran Runeson, come out of retirement again. When that determination often became shaky, my supervisor was my strongest supporter, and it was his encouragement which pulled me out of misery. I have learnt to do research. I have learnt to think like a researcher, and hopefully I will soon be able to master writing while I am thinking! Most sincere thanks to my supervisor. As he promised that his supervision comes with a lifetime guarantee, I return my respect and friendship for him in kind. It is only appropriate to thank my co-supervisor, Dr Jinu Kim, for his guidance through my candidacy. I would have had no better co-supervisor to complement my supervisor’s supervision. I would also like to thank him for keeping me occupied with work to do when I needed to be. Especially to my dearest friends, Seong Ah, Sun Young and Rosa, thank you for putting up with me and being there for me all this time. I am still normal enough to pass as sane because of you. I owe you my sanity. Also my greatest gratitude to all my friends and acquaintances who helped me out without hesitation along the way to the completion of this thesis. Only with your help was it possible to finish the research. To my parents, I thank them for their bottomless love, sacrifices and patience. They have been waiting a long time for their daughter to finish schooling. Finally, I am honoured to present my parents with the highest level of academic achievement. Thank you for trusting me and letting me being me. I love you both. II Table of Contents Abstract ............................................................................................................. I Acknowledgements .................................................................................................. II Table of Contents .................................................................................................... III List of Figures ........................................................................................................... X List of Tables .......................................................................................................... XII Chapter 1 Introduction ......................................................................................... 1 1.1. Background to the research ............................................................................... 1 1.2. Scope and importance of the research .............................................................. 3 1.3. Research question .............................................................................................. 4 1.4. Research aim ...................................................................................................... 5 1.5. Research objectives ............................................................................................ 6 1.5.1. Objective 1 .................................................................................................. 6 1.5.2. Objective 2 .................................................................................................. 7 1.5.3. Objective 3 .................................................................................................. 8 1.5.4. Objective 4 ................................................................................................ 11 1.6. Research outline ............................................................................................... 12 Chapter 2 Literature Review ............................................................................... 15 2.1. Introduction ...................................................................................................... 15 2.2. Traditional economic theories and firms ......................................................... 17 III 2.3. Criticism of microeconomics ............................................................................ 18 2.3.1. Profit maximisation assumption ............................................................... 19 2.3.2. Rationality assumption ............................................................................. 21 2.4. Motivations for the behaviour of the firm ....................................................... 23 2.4.1. The nature of the firm ............................................................................... 23 2.4.2. Introduction to institutional economics ................................................... 25 2.4.2.1. Transaction costs theory .................................................................... 26 2.4.2.2. Bounded