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Cooperation, corporate culture and incentive intensity

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We develop a theory of the firm in which the willingness of workers to cooperate with each other plays a central role. We study a dynamic principal-agent problem. In each period, the firm (the principal) chooses an incentive intensity and the employees allocate effort between individual production and tasks that involve cooperating with other employees. By extending the set of employee motivators beyond the purely financial we are able to introduce a precise definition of corporate culture and to show how firms optimally manage their culture. Our theory helps explain why different firms placed in similar "physical" circumstances, choose different incentive systems. It also helps explain how corporate culture can be a hard-to-imitate asset which yields some firms excess profits

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