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We develop a theory of the firm in which the willingness of workers to cooperate with each other plays a central role. We study a dynamic principal-agent problem. In each period, the firm (the principal) chooses an incentive intensity (how much to pay workers per-unit of measured output) and the employees (the agents) allocate effort between individual production and tasks that involve cooperating with other employees. Following the literature on organizational behavior, (i) employees are willing to engage in cooperative tasks even when these tasks are less effective at increasing their measured output and (ii) the level of cooperation is increasing in past levels of cooperation in the firm and decreasing in the incentive intensity. Hence, an increase in the incentive intensity does not just increase current effort, it has important dynamic consequences: future employee cooperativeness falls. We show how the firm balances these two effects to maximize its lifetime profits. By extending the set of employee motivators beyond the purely financial, we are able to introduce a precise definition of corporate culture and to show how firms optimally manage their culture. Our theory helps explain why different firms, placed in similar “physical” circumstances, choose different incentive systems. It also helps explain how corporate culture can be a hard-to-imitate asset which yields some firms excess profits. Download Paper
We study a dynamic principal-agent problem where social capital is an important part of the system of incentives. In each period the firm chooses an incentive intensity, and its employees allocate effort between individual and cooperative tasks. Cooperative tasks are within bounds -more productive than individual tasks, but employees are not monetarily rewarded for them. Rather, and consistent with recent work in experimental economics, employees allocate effort to cooperative tasks because they derive utility from cooperation. The utility from cooperation is endogenously de-termined, and depends on how much others have cooperated in the past and on the firm's incentive intensity. Consequently, the cooperativeness of the workforce, which we also call the firm's "social capital," follows a dynamic process where the incentive intensity acts as a control variable. We show that the optimal choice of incentives can create cultural differences across firms. Download Paper