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Inertia and Incentives: Bridging Organizational Economics and Organizational Theory


  • Rebecca Henderson
  • Sarah Kaplan


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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  • Rebecca Henderson & Sarah Kaplan, 2005. "Inertia and Incentives: Bridging Organizational Economics and Organizational Theory," NBER Working Papers 11849, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11849
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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Martin Ruckes & Thomas Rønde, 2015. "Dynamic Incentives in Organizations: Success and Inertia," Manchester School, University of Manchester, vol. 83(4), pages 475-497, July.
    8. Tomasz Obloj & Peter Zemsky, 2015. "Value creation and value capture under moral hazard: Exploring the micro-foundations of buyer– supplier relationships," Strategic Management Journal, Wiley Blackwell, vol. 36(8), pages 1146-1163, August.
    9. Constance E. Helfat & Margaret A. Peteraf, 2015. "Managerial cognitive capabilities and the microfoundations of dynamic capabilities," Strategic Management Journal, Wiley Blackwell, vol. 36(6), pages 831-850, June.
    10. 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.
    11. 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.
    12. 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.
    13. Victor M. Bennett & Robert Seamans & Feng Zhu, 2015. "Cannibalization and option value effects of secondary markets: Evidence from the US concert industry," Strategic Management Journal, Wiley Blackwell, vol. 36(11), pages 1599-1614, November.
    14. Meran, Georg & Schwarze, Reimund, 2015. "A Theory of Optimal Green Defaults," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113185, Verein für Socialpolitik / German Economic Association.
    15. Li, Linwei & Jiang, Feifei & Pei, Yunlong & Jiang, Nengqian, 2017. "Entrepreneurial orientation and strategic alliance success: The contingency role of relational factors," Journal of Business Research, Elsevier, vol. 72(C), pages 46-56.
    16. 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.

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    JEL classification:

    • L0 - Industrial Organization - - General
    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General

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