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Social capital, corporate culture and the incentive intensity

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The authors study a dynamic principal-agent problem where social capital is an important part of the system of incentives. In each period the firm chooses an incentive intensity, and its employees allocate effort between individual and cooperative tasks. Cooperative tasks are - within bounds - more productive than individual tasks, but employees are not monetarily rewarded for them. Rather, and consistent with recent work in experimental economics, employees allocate effort to cooperative tasks because they derive utility from cooperation. The utility from cooperation is endogenously determined, and depends on how much others have cooperated in the past and on the firm's incentive intensity. Consequently, the cooperativeness of the workforce, which the authors also call the firm's "social capital", follows a dynamic process where the incentive intensity acts as a control variable. They show that the optimal choice of incentives can create cultural differences across firms.

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