Dynamic Incentives in Organizations: Success and Inertia

Martin Ruckes, Thomas Rønde

    Research output: Contribution to journalJournal articleResearchpeer-review

    Abstract

    We present a two-period model in which an employee searches for business projects in a changing environment. An employee who discovers a profitable project in period 1 is reluctant to search again in period 2 because the old project may continue to be profitable. Management's response to this inertial tendency is either to increase the financial incentives to encourage searching or to accept no searching. The former response increases search efforts and total profits; the latter response has the opposite results. Inertia can be removed by restructuring the firm in period 2, but this may create a time-inconsistency problem.
    We present a two-period model in which an employee searches for business projects in a changing environment. An employee who discovers a profitable project in period 1 is reluctant to search again in period 2 because the old project may continue to be profitable. Management's response to this inertial tendency is either to increase the financial incentives to encourage searching or to accept no searching. The former response increases search efforts and total profits; the latter response has the opposite results. Inertia can be removed by restructuring the firm in period 2, but this may create a time-inconsistency problem.
    LanguageEnglish
    JournalManchester School
    Volume83
    Issue number4
    Pages475-497
    Number of pages23
    ISSN1463-6786
    DOIs
    StatePublished - 2015

    Cite this

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    Dynamic Incentives in Organizations : Success and Inertia. / Ruckes, Martin; Rønde, Thomas.

    In: Manchester School, Vol. 83, No. 4, 2015, p. 475-497.

    Research output: Contribution to journalJournal articleResearchpeer-review

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    AU - Rønde,Thomas

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    AB - We present a two-period model in which an employee searches for business projects in a changing environment. An employee who discovers a profitable project in period 1 is reluctant to search again in period 2 because the old project may continue to be profitable. Management's response to this inertial tendency is either to increase the financial incentives to encourage searching or to accept no searching. The former response increases search efforts and total profits; the latter response has the opposite results. Inertia can be removed by restructuring the firm in period 2, but this may create a time-inconsistency problem.

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