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Towards a motivation-based theory of the firm

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Governance- and competence-based theories of the firm have often been perceived to be competing but also potentially complementary understandings of how and why firms exist vis-à-vis other institutional arrangements, such as markets. This paper argues that by examining the motivational mechanisms through which firms and markets influence individuals' behavior, it is possible to integrate these two approaches. Firms are organizational devices that offer greater levels of flexibility for tailoring motivational processes to idiosyncrasies stemming from individual preferences or task requirements. Equally, the motivational context in firms can be adapted to changing requirements more easily than that of markets. A model of motivational mechanisms in firms and markets is proposed and used to show that governance- and competence-based approaches can be seen as special cases of a more general motivation-based theory of the firm. The governance-based perspective emphasizes the role of incentives (extrinsic motivation) in counteracting opportunism and contractual hazards. Competence-based theories, on the other hand, highlight a notion of the firm as a social community in which members wish to comply with the embedded norms and values (normative intrinsic motivation). A third important mechanism - hedonic intrinsic motivation - not yet considered so far in this debate is discussed here. It links firm existence to the ability to facilitate the realization of an individual's aspirations and, more simply, their enjoyment of life. The authors discuss the conditions under which firms and markets are expected to prevail according to this view, and propose a research agenda to evaluate the potential implications of this theory for their current understanding of organizational boundaries, evolution and performance.

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