Integration Through Incentives Within Differentiated Organizations

Abstract

The specialization of activity within organizations can make it worthwhile to motivate collaboration efforts, but also makes such efforts less effective through coordination challenges. Drawing on the concepts of organizational differentiation and integration, we present a formal analysis of the manner in which these two consequences of specialization shape the effectiveness of collaborative incentives in complex organizations. We show that ignoring the coordination challenges created by differentiation does not merely impede the achievement of gains from integration, but can lower organizational performance below the levels achieved when such gains are simply ignored. Thus, treating inter-unit collaboration purely as a problem of motivating cooperation can be counter-productive.

Keywords: Incentives, Coordination, Organization design

JEL Classification: L22, D23