Dynamic Incentives in Organizations: Success and Inertia

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.