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Inertia and Incentives: Bridging Organizational Economics and Organizational Theory

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  • Rebecca Henderson
  • Sarah Kaplan

Abstract

Organizational theorists have long acknowledged the importance of the formal and informal incentives facing a firm%u2019s employees, stressing that the political economy of a firm plays a major role in shaping organizational life and firm behavior. Yet the detailed study of incentive systems has traditionally been left in the hands of (organizational) economists, with most organizational theorists focusing their attention on critical problems in culture, network structure, framing and so on -- in essence, the social context in which economics and incentive systems are embedded. We argue that this separation of domains is problematic. The economics literature, for example, is unable to explain why organizations should find it difficult to change incentive structures in the face of environmental change, while the organizational literature focuses heavily on the role of inertia as sources of organizational rigidity. Drawing on recent research on incentives in organizational economics and on cognition in organizational theory, we build a framework for the analysis of incentives that highlights the ways in which incentives and cognition -- while being analytically distinct concepts -- are phenomenologically deeply intertwined. We suggest that incentives and cognition coevolve so that organizational competencies or routines are as much about building knowledge of %u201Cwhat should be rewarded%u201D as they are about %u201Cwhat should be done.%u201D

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11849.

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Date of creation: Dec 2005
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Publication status: published as Henderson, Rebecca and Sarah Kaplan. "Inertia an dIncentives: Bridging Organizational Economics and Organizational Theory." Organization Science 16, 5 (Sept-Oct 2005): 509-521.
Handle: RePEc:nbr:nberwo:11849

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  1. Giovanni Dosi & Daniel A. Levinthal & Luigi Marengo, 2003. "Bridging contested terrain: linking incentive-based and learning perspectives on organizational evolution," Industrial and Corporate Change, Oxford University Press, vol. 12(2), pages 413-436, April.
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Cited by:
  1. van Rijnsoever & Marius Meeus & Roger Donders, 2012. "The effects of economic status and recent experience on innovative behavior under environmental variability: an experimental approach," Innovation Studies Utrecht (ISU) working paper series, Utrecht University, Department of Innovation Studies 12-01, Utrecht University, Department of Innovation Studies, revised Jan 2012.
  2. Ferreira, Luciana C. de Mesquita, 2011. "Attention process: A multilevel perspective," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_261, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  3. Peter Abell & Teppo Felin & Nicolai Foss, 2008. "Building micro-foundations for the routines, capabilities, and performance links," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(6), pages 489-502.
  4. König, Andreas & Schulte, Martin & Enders, Albrecht, 2012. "Inertia in response to non-paradigmatic change: The case of meta-organizations," Research Policy, Elsevier, Elsevier, vol. 41(8), pages 1325-1343.
  5. Velu, C. & Iyer, S., 2008. "The Rationality of Irrationality for Managers: Returns- Based Beliefs and the Traveller’s Dilemma," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0826, Faculty of Economics, University of Cambridge.
  6. Luigi Marengo & Corrado Pasquali, 2010. "How to get what you want when you do not know what you want. A model of incentives, organizational structure and learning," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2010/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  7. Miguel Cunha & Arménio Rego & Antonino Vaccaro, 2014. "Organizations as Human Communities and Internal Markets: Searching for Duality," Journal of Business Ethics, Springer, Springer, vol. 120(4), pages 441-455, April.
  8. van Rijnsoever, Frank J. & Meeus, Marius T.H. & Donders, A. Rogier T., 2012. "The effects of economic status and recent experience on innovative behavior under environmental variability: An experimental approach," Research Policy, Elsevier, Elsevier, vol. 41(5), pages 833-847.
  9. Kaplan, Sarah & Tripsas, Mary, 2008. "Thinking about technology: Applying a cognitive lens to technical change," Research Policy, Elsevier, Elsevier, vol. 37(5), pages 790-805, June.
  10. Oliver Baumann & Nils Stieglitz, 2011. "Motivating Organizational Search," DRUID Working Papers, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies 11-08, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.

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