The Firm as a Cultivator of Internal Relationships: How Rotation Supports Favor Exchanges in Organizations

Strategy & Business Policy

Speaker: Nick Argyres

Professor - Wash University

Conference  Jouy-en-Josas / room meeting T201

Abstract: 

In multidivisional firms, divisions must occasionally transfer resources to each other to address unforeseen contingencies. Yet, the organization typically lacks the information to enforce unscheduled resource transfers, and divisions lack the budgetary discretion to pay for them. We model interdivisional cooperation as a “favor-exchange” agreement in which a division’s manager may transfer resources to another division in the hope of being a receiver in the future. We show that by reassigning managers to roles over time, the organization can facilitate internal favor-exchange agreements. We derive conditions under which role rotation makes the promise of interdivisional favor exchanges more credible by increasing the managers’ future rewards from cooperation (rotation across divisions) or the punishment they suffer after defection (rotation in and out of leadership positions). We discuss empirical implications of the model, as well as applications to other kinds of organizations such as government agencies, buyer-supplier relationships, and strategic alliances.