Resources and culture in organizations

• Date: 01 October 2020
• DOI: http://doi.org/10.1111/jems.12388
• Published date: 01 October 2020
• Author: Marcus Tomaino,Suraj Prasad

J Econ Manage Strat. 2020;29:854–872.wileyonlinelibrary.com/journal/jems854

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© 2020 Wiley Periodicals LLC

Received: 23 August 2019

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Revised: 8 June 2020

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Accepted: 10 June 2020

DOI: 10.1111/jems.12388

ORIGINAL ARTICLE

Resources and culture in organizations

Suraj Prasad

1

|Marcus Tomaino

2

1

School of Economics, University of

Sydney, Sydney, New South Wales,

Australia

2

Department of Economics, University of

Pennsylvania, Philadelphia, Pennsylvania

Correspondence

Suraj Prasad, School of Economics,

University of Sydney, Sydney, NSW,

Australia.

Email: suraj.prasad@sydney.edu.au

Abstract

We look at how an organization's level of resources interacts with its culture—

that is, its shared beliefs and preferences. We consider an organization where

workers exert effort to develop projects. These projects (a) have externalities

for other members, (b) compete for funds when resources are scarce, and (c)

can be implemented in various ways, which members have beliefs and pre-

ferences over. When resources are plenty, so that all feasible projects are

funded, workers' efforts are independent of each other and a coherent culture

is optimal. By contrast, when resources are scarce, competition across workers

with diverging beliefs or preferences (competing cultures) can be optimal.

1|INTRODUCTION

When thinking about motivation in organizations, economists tend to emphasize pay for performance, where a

worker's pay is tied to outcomes that benefit the organization. In practice, however, organizations rely on a richer set of

instruments to solve the motivation problem. One such instrument is the culture of the organization—that is, the extent

to which beliefs and preferences are shared across members of the organization. The purpose of our paper is to provide

an economic way to think about some aspects of how culture motivates workers.

To see ways in which culture might serve as a motivational lever, consider the examples of the National Forest

Service (NFS) and the National Park Service (NPS)—two U.S. government agencies with roughly similar functions, each

responsible for managing large tracts of land. In the NFS, new recruits who are selected carefully, undergo rigorous

training and are immediately indoctrinated in the ways of professional forest management. This ensures that their

performance is always in line with the overarching goal of the organization. In fact, as Herbert Kaufman notes in his

study of the NFS, foresters are if anything “too zealous in their conformance”toward organizational policy (see

Kaufman, 1960, pp. 4, 5). We refer to such an organization, where members with shared beliefs and preferences work

toward the same outcome, as one with a coherent culture.

To compare, there is often conflict within the NPS over the proper way to manage these resources. Arguably, this is

driven by an “inherent duality”in the self‐stated purpose of the organization, which is to both “conserve the scenery

and the natural and historic objects”whilst at the same time “providing for the [public's] enjoyment”of these natural

resources. With proponents on both sides of this argument within the organization, a question as simple as “Should this

section of trees be cut back to enable easier access to camping grounds?”can be hotly debated (Goodsell, 2011, pp. 111,

112.). Borrowing a phrase from James Q. Wilson in his book Bureaucracy (p. 92), we refer to this type of an organi-

zation, where members have diverging beliefs or preferences over outcomes, as one with competing cultures.

These views held by members of an organization matter in business settings too. At Facebook, for example,

disagreements over a plan to integrate services into a single privacy‐focused platform led to the exit of two of its top

executives.

1

As one of the departing executives put it, “we are turning a new page in our product direction. This will be

a big project and we will need leaders who are excited to see the new direction through.”

At Microsoft, a focus on online (or cloud) computing led to disagreements within the organization over the role of

its traditional (and highly profitable) business for software for physical on‐site servers (the Server and Tools Business).

2

To this end, Satya Nadella (the current CEO of Microsoft) was made the head of the Server and Tools Business (STB)

and was “tasked with leading Microsoft's enterprise transformation into the cloud.”To build “shared context”for this

cloud‐first strategy, Nadella “set about assembling the right team,”both from inside and outside the company (see

Iansiti & Serels, 2013, pp. 9–11; Nadella, Shaw, & Nichols, 2017; pp. 57, 58). He also made efforts “to convince the whole

organization that the cloud was an integral part of STB's future.”

We develop a framework to understand the implications that patterns of culture have for incentives in organiza-

tions. In particular, we examine how culture interacts with an organization's level of resources in the provision of

incentives.

In our model, a principal (the head of the organization) hires two agents (workers) to independently develop a

project each. Think of this as devising an initiative—for example, finding a way to improve trails in a national park, or

designing a new Facebook platform. Agents exert effort to ensure that their project is feasible. Infeasible projects are

discarded whereas feasible projects require funds for the developing agent to implement it. A funded project can be

implemented in one of many ways, which we model as points on a Hotelling line. In the national parks example, points

on the left of the line can be thought of as implementations that emphasize conservation whereas points on the right

emphasize recreation more. In the Facebook example, think of points on the left as applications that prioritize privacy

whereas points on the right are applications that do not.

There are three key elements in our model worth emphasizing. First, a project developed by one agent and

implemented in the organization has externalities for other members of the organization. These externalities take the

form of an expected benefit from the project, with the benefit being larger when the project is more aligned to the

member's preference. This leads to free riding in the organization and is the channel through which its members'

preferences and beliefs matter. Positive externalities arise naturally in mission‐oriented settings where workers care

about their organization's output. They also feature in business settings where a project developed by one member leads

to the overall success of the organization, which in turn benefits other members. This benefit could be because the

project complements existing products offered by other members, or it could be a reputational benefit from being part of

a successful organization.

Second, projects may have to compete with each other for funding. When resources are plenty, each feasible project

gets funded. With scarce resources, on the other hand, there is a cap on the number of feasible projects that can be

funded. In particular, when there are two feasible projects, one gets funded and the other does not. Although we

primarily think of resources in terms of funding, there are other interpretations that are consistent with our notion of

scarcity—where there is a scarcity of “slots”relative to implementable projects in the organization. For example, an

organization may be constrained in taking multiple products to a market or different projects developed may be

incompatible with one another.

The third key element is the way we model culture. We assume that each member has an ideal point on the

Hotelling line which corresponds to an implementation that maximizes their expected benefit. The closer these ideal

points are in an organization, the more coherent its culture.

To begin with, we take the culture of an organization as exogenously given and see how it interacts with resources to

provide incentives. Later in our analysis, we endogenize this choice by allowing the head to select the ideal points of the

agents. There are two ways to interpret this choice. One is that agents are hired or selected to develop new projects

based on their observable beliefs and preferences. This interpretation applies more naturally to types of workers that

organizations have more information on, say those with more experience within or outside the organization, and those

in leadership positions who are scrutinized more carefully. The second interpretation—which we do not model

explicitly—is that workers are socialized in the organization to shape their beliefs and preferences. This socialization

takes several forms: training, articulation of goals, and job rotation to broaden a worker's perspective. We discuss some

of these instruments to choose culture in more detail in our applications in Section 5.

When resources are plenty, so that all feasible projects can be funded, each agent is essentially a stand‐alone unit

with dedicated resources for a feasible project. Efforts are thus independent across agents and do not depend on the

distribution of ideal points. As a result, the head prefers to hire agents who share his preferences over projects, so that a

coherent culture, if possible, is optimal. When resources are scarce, on the other hand, efforts are substitutes, a problem

exacerbated by externalities across projects which leads to free riding. Given that at most one feasible project can be

funded, and the benefit of implementation is nonrival, agents prefer to let each other bear the cost of effort of

development. Pushing agents' ideal points apart reduces the externality, rendering efforts less substitutable and thus

increasing the probability of successful project development. The cost of these competing cultures, however, is an

implementation which is less appealing to the head.

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