Cooperation, Corporate Culture and Incentive Intensity

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.

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