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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. Nicolai J. Foss, 2001. "Selective Intervention and Internal HybridsInterpreting and Learning from the Rise and Decline of the Oticon Spaghetti Organization," DRUID Working Papers 01-16, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
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  7. Garud, Raghu & Karnoe, Peter, 2003. "Bricolage versus breakthrough: distributed and embedded agency in technology entrepreneurship," Research Policy, Elsevier, vol. 32(2), pages 277-300, February.
  8. George Baker & Robert Gibbons & Kevin J. Murphy, 2001. "Bringing the Market inside the Firm?," American Economic Review, American Economic Association, vol. 91(2), pages 212-218, May.
  9. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
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  11. Tripsas, Mary, 1997. "Surviving Radical Technological Change through Dynamic Capability: Evidence from the Typesetter Industry," Industrial and Corporate Change, Oxford University Press, vol. 6(2), pages 341-77, March.
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Cited by:
  1. Kaplan, Sarah & Tripsas, Mary, 2008. "Thinking about technology: Applying a cognitive lens to technical change," Research Policy, Elsevier, vol. 37(5), pages 790-805, June.
  2. 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 12-01, Utrecht University, Department of Innovation Studies, revised Jan 2012.
  3. Ferreira, Luciana C. de Mesquita, 2011. "Attention process: A multilevel perspective," Insper Working Papers wpe_261, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  4. Oliver Baumann & Nils Stieglitz, 2011. "Motivating Organizational Search," DRUID Working Papers 11-08, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  5. 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.
  6. Miguel Cunha & Arménio Rego & Antonino Vaccaro, 2014. "Organizations as Human Communities and Internal Markets: Searching for Duality," Journal of Business Ethics, Springer, vol. 120(4), pages 441-455, April.
  7. Velu, C. & Iyer, S., 2008. "The Rationality of Irrationality for Managers: Returns- Based Beliefs and the Traveller’s Dilemma," Cambridge Working Papers in Economics 0826, Faculty of Economics, University of Cambridge.
  8. König, Andreas & Schulte, Martin & Enders, Albrecht, 2012. "Inertia in response to non-paradigmatic change: The case of meta-organizations," Research Policy, Elsevier, vol. 41(8), pages 1325-1343.
  9. 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 2010/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  10. 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, vol. 41(5), pages 833-847.

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