Resting on Laurels: A Theory of Inertia in Organizations

Martin Ruckes and Thomas Rønde
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Martin Ruckes: University of Wisconsin-Madison
Thomas Rønde: Institute of Economics, University of Copenhagen

No 2003-06, CIE Discussion Papers from University of Copenhagen. Department of Economics. Centre for Industrial Economics

Abstract: We present a model where the employees of a firm have to search for profitable business projects in a changing environment. Employees who have found a successful project in the past period are shown to be reluctant to search for new and better projects leading to corporate inertia. This reduces the firm’s profits in the present period. Still, inertia can in some situations increase overall profits, because it raises the employees’ initial incentive to find successful projects. Reorganization and gradually reducing control over the employees’ search efforts are means to overcome inertia. However, optimal policies are not always time-consistent. This leads to too much reorganization and to too little control reduction when the firm has no commitment power.

Keywords: incentives in organizations; inertia; innovation; reorganization (search for similar items in EconPapers)
JEL-codes: L2 M12 M54 O31 O32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2003-10
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