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Dynamic Incentives in Organizations: Success and Inertia
Author(s) -
Ruckes Martin,
Rønde Thomas
Publication year - 2015
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12075
Subject(s) - restructuring , incentive , period (music) , inertia , economics , microeconomics , business , finance , physics , classical mechanics , acoustics
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.