On the strength of corporate cultures


European Economic Review

April 1999, vol. 43, n°4-6, pp.1021-1037

Departments: Finance, GREGHEC (CNRS)

Keywords: Corporate culture; Incentives; Screening; Endogenous complementarities

We model corporate culture(s) as production technologies for which employees have to undertake culture-specific investments that improve their effectiveness. At a later date, the organization can adopt cultural changes that make this investment partially redundant. This leads to under-investment. However, as agents invest more, the organization's opportunity cost of a change increases, which in turn increases each agents' incentives to invest. This externality among agents leads to multiple equilibria. Otherwise similar organizations can thus exhibit either high investment levels and low probability of changes (strong culture) or low investment levels and high probability of changes (weak culture). We also explore some implications for the nature and management of corporate culture.