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Inertia and Incentives: anizational Economics anizational Theory
Kaplan Sarah,Henderson a
For a firm to be able to derive the “optimal” contract, a great deal of knowledge has to be in place— and known to everyone on both sides of the contract. Managers need to understand what the possible set of actions is, how enjoyable or costly these actions are going to be for the individual employee, and the link between these actions and useful output. Then they need to be able to design a relational contract between the firm and the employees that will persuade the employees that the firm will honor such a promise. In a world of perfect information in which new relational contracts can be simply announced, this would not, of course, be a problem— but in the messy world of a anization, it is likely to be very difficult indeed. The development of new incentives regimes under these conditions faces three separate but interrelated problems— uncertainty around incentives, uncertainty around the task, and the difficulties inherent in structuring credible new incentives. While these challenges are present for any firm in a new arena, we suggest that established firms face particular hurdles not salient to startups.
Consider first those challenges that all firms face. First, identifying exactly what an employee is likely to do without being paid to do it, or what his or her true