Abstract:

We develop a theory of the firm in which cooperation among workers plays a central role and the firm is able to control the degree to which workers cooperate. We study a dynamic principal-agent problem. In each period, the firm (the principal) chooses an incentive intensity (how much to pay workers per-unit output) and the employess (the agents) allocate effort between individual production and tasks that involve cooperating with other employees. Following the literature on organizational behavior, employees value cooperation and the strength of these values depends on: (i) How much cooperation they have experienced in the past, and (ii) The incentive intensity chosen by the firm. As a result of these effects the firm can increase its incentive intensity which results in greater output today, but only at the cost of eroding cooperation and reducing output tomorrow. We show how the firm optimally adjusts its incentive intensity over time to influence the evolution of its culture and to maximize lifetime output. Our theory helps explain why different firms, placed in similar "physical" circumstances, choose different incentive schemes. It also helps explain how coroprate culture becomes a hard-to-imitate asset which yields the firms that have it excess profits.