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Resting on Laurels: A Theory of Inertia in Organizations

Author

Listed:
  • Martin Ruckes

    (University of Wisconsin-Madison)

  • Thomas Rønde

    (Institute of Economics, University of Copenhagen)

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.

Suggested Citation

  • Martin Ruckes & Thomas Rønde, 2003. "Resting on Laurels: A Theory of Inertia in Organizations," CIE Discussion Papers 2003-06, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  • Handle: RePEc:kud:kuieci:2003-06
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    File URL: http://www.econ.ku.dk/cie/dp/dp_2003-2006/2003-06.pdf/
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    More about this item

    Keywords

    incentives in organizations; inertia; innovation; reorganization;

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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