Inertia and Incentives: Bridging Organizational Economics and Organizational Theory

42 Pages Posted: 4 Apr 2006 Last revised: 1 Aug 2009

See all articles by Rebecca M. Henderson

Rebecca M. Henderson

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Sarah Kaplan

University of Toronto - Rotman School of Management

Date Written: December 2005

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

Suggested Citation

Henderson, Rebecca M. and Kaplan, Sarah, Inertia and Incentives: Bridging Organizational Economics and Organizational Theory (December 2005). NBER Working Paper No. w11849. Available at SSRN: https://ssrn.com/abstract=871831

Rebecca M. Henderson (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-543
Cambridge, MA 02142
United States
617-253-6618 (Phone)
617-253-2660 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sarah Kaplan

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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