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Resting on Laurels: A Theory of Inertia in Organizations

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  • Martin Ruckes

    (University of Wisconsin-Madison)

  • Thomas Rønde

    (Institute of Economics, University of Copenhagen)

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    Abstract

    We present a model where the employees of a firm have to search for profitable business projects in a changing environment. Employees who have found a successful project in the past period are shown to be reluctant to search for new and better projects leading to corporate inertia. This reduces the firm’s profits in the present period. Still, inertia can in some situations increase overall profits, because it raises the employees’ initial incentive to find successful projects. Reorganization and gradually reducing control over the employees’ search efforts are means to overcome inertia. However, optimal policies are not always time-consistent. This leads to too much reorganization and to too little control reduction when the firm has no commitment power.

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    File URL: http://www.econ.ku.dk/cie/dp/dp_2003-2006/2003-06.pdf/
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    Bibliographic Info

    Paper provided by University of Copenhagen. Department of Economics. Centre for Industrial Economics in its series CIE Discussion Papers with number 2003-06.

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    Length: 36 pages
    Date of creation: Oct 2003
    Date of revision:
    Handle: RePEc:kud:kuieci:2003-06

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    Keywords: incentives in organizations; inertia; innovation; reorganization;

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