Lecture 9 / C5: Incentives, Groups and Teams: Submission of Assignment 1

LECTURE 9 / C5: INCENTIVES, GROUPS AND TEAMS
SUBMISSION OF ASSIGNMENT 1
Essential reading
H & B Chapters 9, 10, 12, 22.
D and S Sections 6.1, 6.2, 7.4, 7.7, 7.8, Chap 5.
Aim of the chapter

To develop frameworks for understanding the role that groups and teams
play in organisational analysis.
Background Notes
1. Decision Tree
C5 Incentives, Groups and Teams 122

Comparing decision theory (economics) with social action theory (sociology)
• Both build model around beliefs and ‘desires’ (i.e. payoffs)
• Could make beliefs and desires endogenous in both
• Both ‘forward’ looking
Weakness with Decision Tree approach:

• Do individuals really make decisions like this (e.g. managers)
- limited knowledge, information?
- limited calculation skills?
- Calculate probabilities?
- All outcomes of each action?
- Measure value of outcomes?
• Is it still a good approximation?
• Is it better normatively rather than descriptively / explanatory?
2. Game Theory
Game theory is a branch of applied mathematics that is often used in the
context of economics. It studies strategic interactions between agents. In
strategic games, agents choose strategies which will maximize their return,
given the strategies the other agents choose. The essential feature is that it
provides a formal modelling approach to social situations in which decision
makers interact with other agents. Game theory extends the simpler
optimisation approach developed in neoclassical economics.
The field of game theory came into being with the 1944 classic Theory of
Games and Economic Behavior by John von Neumann and Oskar
Morgenstern. A major center for the development of game theory was RAND
Corporation where it helped to define nuclear strategies.
Game theory has played, and continues to play a large role in the social
sciences, and is now also used in many diverse academic fields. Beginning in
the 1970s, game theory has been applied to animal behaviour, including
evolutionary theory. Many games, especially the prisoner's dilemma, are used
to illustrate ideas in political science and ethics. Game theory has recently

drawn attention from computer scientists because of its use in artificial
intelligence and cybernetics.
In addition to its academic interest, game theory has received attention in

popular culture. A Nobel Prize–winning game theorist, John Nash, was the
subject of the 1998 biography by Sylvia Nasar and the 2001 film A Beautiful
Mind. Game theory was also a theme in the 1983 film War Games. Several
game shows have adopted game theoretic situations, including Survivor.
Although some game theoretic analyses appear similar to decision theory,

game theory studies decisions made in an environment in which players
interact. In other words, game theory studies choice of optimal behavior when
costs and benefits of each option depend upon the choices of other
individuals. The games studied by game theory are well-defined mathematical
objects. A game consists of a set of players, a set of moves (or strategies)
available to those players, and a specification of payoffs for each combination
of strategies. Most cooperative games are presented in the characteristic
function form, while the extensive and the normal forms (see 5.2 diagram
below) are used to define non-cooperative games.
Strategic Interactions
Individuals act / choose in an environment that may (be anticipated) to be
reactive, thus Game theory appropriate e.g. managers’ actions depend on
what they anticipate competitor managers will do and vice versa.

5.1 INTRODUCTION
In the previous chapter we studied individuals; now we turn to groups (the

sociologists’ and psychologists’ term) and teams (more favoured by
economists). Groups/teams often need to be the focus of attention in
controlling and co-ordinating activities in the service of an organisation’s
objectives. Sometimes these groups can be regarded as sufficiently ‘cohesive’
to treat them as ‘individuals’, but other times not.
Game theory, as the pre-eminent theory of strategic interaction, is central to

modern organisation theory. Game theory is concerned with situations in
which there are two or more players. Moreover, these players have to make
inter-dependent decisions, i.e. each player has to take into account the other
players’ decisions. Game theory extends the idea of rational choice to
situations where ‘players’ need to take account of what other players have
done or might do when making their own decisions. Furthermore, they
must assume that the other players are also calculating likewise. It is often
useful to picture the different positions on the market–organisation
continuum as involving different strategic calculations.
5.2 THE ECONOMISTS’ CONTRIBUTION
Team production formally means: the output of a group of individual agents

does not depend solely upon the sum of their individual inputs (e.g. effort).
Inputs are not separable but complement each other. Team production thus
entails for a principal (P) a span of co-ordination rather than a span of control
over his agents (As).

Alchian and Demsetz (1972) shows why the entrepreneur (owner + manager
or monitor + team) who is remunerated after all the other claimants have been
rewarded should control and co-ordinate (i.e. manage) enterprises, if the
production is based upon team production and the manager needs to be
motivated to ‘offset shirking’ (i.e. slacking). The authors’ argument is in effect
a justification of the capitalist organisation of the firm. It shows why capital
should hire labour rather than the reverse – a workers’ cooperative – where

labour hires capital (→ Chap 8). In short, the work of Alchian and Demsetz
demonstrates the limitations of teams that lack strong leadership.
5.2.1 Prisoner’s Dilemma

The idea of team production and the individual propensity to shirk (free ride)
can be characterised as an n - person prisoner’s dilemma game. If shirking is
not easily detectable then the collective effort without co-ordination will be at
the sub-optimal Nash equilibrium (i.e. the prediction of what rational decision-
makers will choose) rather than at the optimal Pareto equilibrium (the best
situation beyond which either one party would suffer a disadvantage/loss).
Furthermore, promises not to shirk are not binding as there is no incentive to
honour them. There are thus gains to be had for all by finding the requisite co-
ordination mechanism (i.e. Pareto equilibrium). This being the case, the
mechanism can be conceived as voluntary.
DEFINITION: The normal (or strategic form) game is usually represented

by a matrix which shows the players, strategies, and payoffs. More generally it
can be represented by any function that associates a payoff for each player
with every possible combination of actions. In the accompanying example
there are two players; one chooses the row and the other chooses the column.
Each player has two strategies, which are specified by the number of rows
and the number of columns. The payoffs are provided in the interior. The first
number is the payoff received by the row player (Principal in our example); the
second is the payoff for the column player (Agent in our example). Suppose
that Principal plays Down and that Agent plays Left. Then Principal gets a
payoff of 4, and Agent gets 1.
When a game is presented in normal form, it is presumed that each player

acts simultaneously or, at least, without knowing the actions of the other. If
players have some information about the choices of other players, the game
is usually presented in extensive form.

It may help to think in terms of a simple two-player prisoner’s dilemma as
follows. Think how the two players can achieve the Up, Left (3,3) outcome
instead of the current Down, Right (2,2) outcome:
AGENT (A) - second mover
PRINCIPAL
(P) – first
mover
P’s best outcome is (4,1) : P slacks (defects) while A co-operates.

A’s best outcome is (1,4): P co-operates while A slacks (defects).
Nash equilibrium is (2,2):

What rational (self-regarding) decision-makers will choose:
a. P as first mover: P can think ahead and note that A will choose slack
(defect), and so P will pre-empt and choose slack (defect) first. P has no
incentive to choose co-op as he expects A to choose slack (defect).
b. A as first mover: The same Nash equilibrium outcome would result

even if A is the first-mover and not P, i.e. there is no first-mover advantage.
So the equilibrium whoever is the first mover, is for both to slack (defect), i.e.
both will choose Nash strategies for a (2,2) outcome.

Pareto equilibrium is (3,3):
This strategy would make both players ‘better off’ but it also means both
players must co-operate (put in effort). Much of organisation theory is
concerned with how to move interactions from Nash to the Pareto equilibrium.
Now how can the players achieve the (3,3) Pareto equilibrium outcome rather
than the (2,2) Nash equilibrium outcome? It is useful to think in terms of a
number of alternatives, some of which we will explore in subsequent chapters:
• Repeated interactions (such as tit-for-tat (TFT): the strategy that a player

chooses to co-operate in the first round and in the following rounds chooses
whatever the other player did in the previous round.)
• Self-managed co-ordination, i.e. peer group management or

monitoring. (Note that Alchian and Demsetz do not think this will happen.)
• Cultural co-operative norms preventing shirking or enjoining credible /

trustworthy pre-commitments not to shirk.
• A specialised monitor motivated by residual remuneration with the ‘power or

authority’ to punish shirking. (This is Alchian and Demsetz’s favoured solution.)
• Multi-lateral bargaining

Since the Alchian and Demsetz model claims to detect a reason not only for
organisations but also for a particular governance arrangement, it is sensible
here to look at the variety of governance systems in the real world.
5.2.2 The behavioural theory of the firm

Some economists have sought to introduce more realism into their models,
but often at the expense of rigour. The behavioural theory of the firm pictures
organisations as a coalition of participants or stakeholders. It is recognised
that the inducements to participate vary across the different stakeholders and
each stakeholder may be motivated by multiple factors. Introducing a vector of
inducements does not invalidate the mathematical ideas underpinning PA
theory. This is correct, though only if the different factors can be put on a
common scale – usually monetary equivalents. The behavioural theory also
allows for slow adjustment to alternative opportunities (an information issue)
through aspiration levels.

5.2.3 National Systems of Governance

Different national systems of governance draw a broad distinction between
market and network systems and one- or two-tier systems of boards. Market
systems are vulnerable to free-ride problems among their dispersed
ownership (game theory again) but compensate with a developed market for
corporate control. The latter is almost nonexistent in the network systems.
There is, however, much contemporary speculation that the market system is
replacing the network system.

D & S below (Section 7.8) provides a succinct overview of PA theory.

5.3 THE CONTRIBUTION OF PSYCHOLOGISTS AND SOCIOLOGISTS
Social psychologists have been at the forefront in understanding the

process of group formation. (Read Chapters 9 to 12 of Part 3 of H & B on
“Groups and Teams in the Organization”, which give a very comprehensive
overview of these achievements.)
Organisations can often be analysed as a structure of groups and it is

these which impact on the performance of the organisation.

Economists derive their concept of team from non-separable production
functions while sociologists and psychologists take a broader view, as follows:
1. They distinguish a group from an aggregate of individuals. Groups are

collections of individuals (at least n = 2) who identify with the group and
develop various relatively durable relationships with each other, with a set of
different relationships – communication, power, etc. – running over the same
point set.
Types of group tasks are recognised though the definitions given are not
terribly rigorous.
a. Additive tasks arise when each individual produces the
same output independently of others (same as economists’ separable
production).
b. Non-additive tasks are equivalent to non-separable production. There
are two types:
(1) Conjunctive tasks also invoke the role of the most productive in
influencing others in the group.
(2) Disjunctive tasks involve the performance of an
entire group or team that is dependent on the performance of its
best member(s).
2. The Hawthorne studies, designed to test the efficacy of Taylorism,

have had a remarkable impact, culminating in the ‘human relations’ approach
to organisation:
• the Hawthorne effect is now widely recognised in social science
• informal organisations/groups are also recognised as a universal aspect of

attempts to hierarchically control and co-ordinate human activities (rate
busters, chislers and squealers are widely acknowledged)
• informal norms can have a either a positive or negative impact upon

efficiency.

5.3.1 Evolution of Groups
Since both formal and informal groups are found within all organisations, it
is important to have some appreciation of how they evolve. Formal groups
usually follow the dictates of the organisation design and task or job
interdependencies (→ Chap 10). The informal structure of these groups
and those with no formal basis seem to follow certain patterns. There have
been many attempts to describe and explain the processes which generate
these patterns. Two of them are those of Homans and Tuckman – though
many others could have been outlined.

You should become acquainted especially with Tuckman’s diagram though
not the various terms used. Note that the central ideas are best understood in
graph theory terms.

Chapter 9 in H & B concludes with sections entitled ‘Groups and teams’
and ‘Virtual teams’. Notice that the term ‘team’ here is not used in the manner
of economists – so be careful in your written work to define your terms.
Table 9.2 below is rather useful, distinguishing between teams and single-
leader groups. Teams are here defined as groups which effectively control
and co-ordinate activities to fulfil a purpose or objective.
You have a powerful way of thinking about structure using the ideas from
graph and di-graph theory. This should enable you to organise the copious
material in this chapter much more effectively. Note that group structure is the
pattern of (paired) relations of differing sorts (eg. power, status,
communication, liking, role expectations, leadership etc) over the same point
set (individuals). Groups can also have external relations to members of other
groups. Indeed, a sociometric diagram is a di-graph – so you have no need to
remember it as a ‘sociogram’ (a chart showing social attraction/liking

relationships between individual members of a group). In Fig 10.2 below,
some of the structures are valued, some only dichotomous.
Group communication is expected to be incomplete but strongly connected.

The position on the page of the points has no meaning from a graph theory
point of view. Thus, the ‘centralised network’ in Figure 10.2 which the authors
intend the diagrams to be interpreted horizontally, could equally be drawn as
a span of control of 3. To avoid confusion it is important when using graphs to
adopt the convention whereby it is made clear whether a hierarchical
dimension is implied or not.

5.3.2 Social Roles and Role Analysis
The concept of social role is introduced as a set of expectations about
appropriate activities that others hold of the occupant of a position / identity in
a group or organisation. Some sociologists would add to this definition the
idea of ‘normative’, making it normative expectations, emphasising the
institutionalised (→ Chap 7) nature of social roles.
Once again, notice that the expectations can be envisaged as a structure of

relations (expectations about appropriate activities) running between a set
of positions. The in-degree of a position (number of arcs coming into a node in
a di-graph) gives a picture of the expectations by occupants of other positions
applied to an occupant of the focal position. The out-degree (number of nodes
going from a node) gives the pattern of expectations the occupants of a given
position have of the occupants of other positions. So social roles provide a
powerful way of looking at groups and organisations.
Role analysis is sometimes suggested as an alternative to rational choice

theory as a way of explaining why people act in the ways they do. It is
proposed that they follow the normative expectations appropriate to the
positions they occupy rather than make calculations about prospective
outcomes. Indeed, this picture once gained great currency in sociology. All
social systems were viewed as a set of positions or identities between which
normative expectations determined the appropriate activities.
If there happened to be contradictory expectations (e.g. if a father and mother

– two positions / identities – have contradictory expectations of their child)
then the child, as occupant of that role, experiences intra-role conflict. How
occupants of roles solve this sort of conflict then requires additional
theories. Inter-role conflict arises when an individual occupies more than
one role which puts contradictory claims upon the individual.
This picture of the control and co-ordination of activities, in the absence of

intra- and extra-role conflict, can quite naturally be described as being at
an equilibrium. People as occupants of positions merely follow the dictates

of the normative expectations of their roles. It has inevitably been described
by some critics as static and over-socialised. Furthermore, one might also
ask how the role structure and its inherent institutionalised norms have
evolved in the first place. Some theorists assume that evolutionary stories can
be told in terms of rational self-interest, while others deny that this is possible.
You should note the connection we made earlier between norms, rules and
contracts. Taylorism could be viewed in terms of a role structure.
You should appreciate the variety of types of teams (again beware of the
differing definitions). The major point to note is that ‘teams’, like organisations,
need to be ‘controlled and co-ordinated’. So all the mechanisms we have
identified for achieving control and co-ordination in organisations apply also to
teams. Just as the Study Guide has encouraged you to think of group
structure in graph-theoretical terms, try to organise the material in Chapter 12
in H & B on Teamworking, in terms of the basic mechanisms we have
identified.
In particular, try to characterise sociology’s advice teams, action teams,

project teams and production teams in terms of monitoring, incentive, power,
cultural and democratic mechanisms.

EXAMINATION QUESTIONS
B08 / Q7: Describe the main

assumptions in the behavioural theory of
the firm and, briefly, show how these
differ from the neoclassical theory of the
firm.
P09 / Q4: Under what conditions is team

working a more effective method of
organising production than individuals
working alone? You may answer this
question drawing on sociological and/or economic concepts of organisations.
• Define teams, differentiating between teams and groups and between different kinds
of teams (for example, production teams, cross-functional project teams).
• Discuss economic theories of ‘team production’, the problem of shirking. Include

game theory, the notion of a prisoner’s dilemma in relation to
teams and the work of Alchian and Demsetz on the limitations of teams that lack
strong leadership.
• Discuss sociological and psychological theories of teams, in particular, the work of

human relations and socio-technical systems theorists. Note the more positive spin
given to team production in these approaches compared to economic perspectives.
• Refer to more recent research on team working, for example, teams as a form of
peer groups, surveillance or ‘concertive control’.
A15/Q5: Explain the difference between additive and non-additive tasks (such as
conjunctive and disjunctive tasks). How might the corporate culture affect the
performance of these tasks?

Closing Thot

LECTURE 10 / C6: POWER AND AUTHORITY
Essential reading
H & B Chapter 24 (pp 796 – 824)
D and S Sections 6.3 and 6.5
Aim of the chapter

To conceptualise the role of the highly disputed concepts of ‘power’ and
‘authority’ in controlling and co-ordinating organisations and quasi-
organisations.
6.1 INTRODUCTION
It is often assumed that organisational activities are controlled and co-

ordinated by the power or authority exerted by one person or group over
another. Intuitively, power is exerted when one actor is capable of threatening
subordinates if they do not conform to the superordinate’s wishes. It is natural
to see organisational hierarchies as embodying distributions of relative power.
They are sometimes described as mechanisms for conveying commands/
rules from the top to the bottom. If it is deemed that those issuing commands
are entitled to do so, then the commands are regarded as legitimate and it is
usual to define legitimated power as authority. It turns out, however, that
these innocuous-sounding ideas are fraught with conceptual snags. Indeed,
some social scientists have labelled the concept of power as fundamentally
contested. This is a rather fancy way of saying that no settled definitions,
acceptable to all, can be found.
Many economists are rather reticent about applying the concept of intra-
organisational power in the context of competitive environments. To them, a
competitive labour market leads to voluntary employment contracts which do
not entail any power relationship between P and A.
C6 Power and Authority 154

In the context of the behavioural theory of the firm, D and S introduced the
idea of bargaining power. Economists have been at the forefront of
developing the concept of bargaining (power), often making use of the
precepts of Game Theory.
DEFINITION: In the behavioural theory of the firm, each group of

participants (eg employees, investors, suppliers, distributors, consumers etc)
has its own goals at the aspiration levels that will generally not coincide. The
firm will thus have several goals which are arrived at through a bargaining
process between the groups of participants.
6.2 BARGAINING AND POWER (ECONOMIST’S APPROACH)

Economists note that bargaining is a common relationship, both between
and internal to organisations. They want to understand bargaining from the
standpoint of rational actors, eg in terms of bargaining between management
(M) and labour (L) or trade unions. What might determine the wage rate if
there is room for bargaining (i.e. the labour market is not competitive)? The
assumption is that M has a maximum amount he is prepared to pay L, i.e. Pay
(max), while L has a minimum she is prepared to work for M, Pay (min).
If M and L can agree/contract on a rate anywhere between P(max) and

P(min) then both are better off than if they fail to contract (Pareto
improvement). Thus, M and L have a common interest in striking a deal
but conflicting interests about where, between P(max) and P(min).
Bargaining is the process of reaching a voluntary contract which will stick.
There are two important aspects of bargaining:

• the outcome – the distribution of the ‘bargaining surplus’ between
P(max) and P(min)
• efficiency – minimising the bargaining costs in reaching an outcome.
The theory of bargaining suggests factors which determine both the outcome

and associated bargaining costs. M is powerful if the outcome is close to
P(min) and M’s bargaining costs are low. L is powerful if the outcome is near
P(max) and L’s bargaining costs are low.
The factors determining bargaining power are:

• bargaining time and impatience
• risk aversion
• outside options
• credible commitments
• asymmetric information.
We shall look at each of these and start with the assumption of complete
information.
6.2.1 Bargaining time and impatience

Assume both M and L would prefer to contract earlier rather than later, i.e.
time to agreement constitutes a bargaining cost for both parties. This
often seems a very reasonable assumption. Then if L and M have equal
impatience, they will split the bargaining surplus equally (a particular Nash
equilibrium). The general principles are that, for both M and L:
• bargaining power is proportional relative to patience
• bargaining costs are proportional to impatience.
Note that to get simple results, each party must be assumed to know both
the other’s patience and bargaining costs. In the context of sequential
bargaining (each making offers and counter offers and back and forth again),
then backward induction (where M needs to fix the opening offer will indicate
a Nash equilibrium at the outset (if this opening offer is accepted).
Patience
Formal results aside, what determines relative patience?
• L and M’s available contracting alternatives (see below).
• M’s inventories and L’s saved resources or strike fund. Note that the
better off will in general have more patience and can therefore

distribute the bargaining surplus to their advantage. This picture thus
suggests that bargaining will exacerbate inequalities.
The strategies for increasing bargaining power available to either party are:
• reduce one’s own bargaining costs by increasing one’s patience
• decrease your adversary’s patience by increasing their bargaining costs.
Note, however, that these strategies will also be costly. Therefore, one needs
to balance these costs against prospective gains in terms of favourable
outcome.
6.2.2 Risk aversion

There will always be a risk that bargaining will break down because
circumstances change (often described as ‘exogenous shocks’). There is,
thus, also an inherent risk in not settling now. So the relatively risk-averse
will have higher bargaining costs. Once again, one would expect those with
fewer resources to be relatively risk-averse.
6.2.3 Outside options

Assume M and L have the same patience and risk aversion; then they
should split the bargaining surplus in half. The leading idea is that if either
party has a credible alternative partner with a better offer, then this will
increase their bargaining power. The party can use the credible threat to
contract elsewhere. Note that in perfectly competitive markets there is no
space for credible threats.
6.2.4 Credible Commitment

If either party can commit (prior to or during bargaining) to a division of
the surplus (‘I will not pay more than X’) that favours them and this is seen
as costly to abrogate, then they may increase their bargaining power. The
commitment is credible to the degree that stepping down is costly to the
party concerned. Commitment often works best when a bargainer is
bargaining on behalf of others; for example, a trade union leader who
would lose credibility with the membership if he stepped down. An
adversary will not call your bluff if the commitment is credible.

6.2.5 Asymmetric information
All the above approaches to the sources of bargaining power assume that
each party is fully informed about the opponent’s resources, preferences,
risk attitudes, commitment, etc. The underlying games are based on complete
information. In practice these assumptions are often over-strong and we have
to move to games of incomplete information. When information is not
complete, bargaining can be a bewildering mixture of processes:
1. Learning about your opponent
2. Communicating information about oneself (perhaps false)
3. Achieving an outcome.
In general, bargaining will be inefficient – bargainers will use private

information to their own advantage and send false signals. For example, in
management-labour bargaining, M may be ignorant about L’s P(min),
resources, patience, risk aversion and outside options. Likewise M may also
be similarly misinformed or ignorant about L.
In practice, bargaining raises issues about credible threats and promises and
haggling. (We will return to these issues after studying how sociologists and
psychologists approach the idea of power and kindred concepts.)
6.3 SOCIOLOGISTS’ AND PSYCHOLOGISTS’ APPROACHES TO

POWER AND KINDRED (RELATED) CONCEPTS
Read H & B (pp 796-808) gives a good impression of the conceptual diversity
attached to the idea of power. Briefly put, power is often understood as a
resource held by certain actors and groups to promote their interests and
leverage change. H & B distinguish between three
broad concepts:
• power as property (assets, resources)
• focus of power
• disciplinary power.
It is sometimes difficult to understand what is being said and where the

differing conceptualisations agree and differ. Unfortunately, some of the
writing in this area does not match the requirements of rigour of modern
social science. Many concepts are highly contested (especially the non-
rigorous terms used in B & H Chap 24.
6.3.1 Market or Organisation or Something Else?

Before looking at conceptual matters, let us think about the role of power,
however defined, in co-ordinating and controlling activities within
organisations. Let us go back to the basic idea in Chapter 2 as to
whether a transaction should be left to the market or internalised in the
hierarchical firm. You might now like to think of a third possibility,
whereby the partner to the transaction could bargain, thus keeping the
transaction outside an organisation and yet not in the market (see below).
In competitive conditions (and equilibrium) there is of course no room for

bargaining. But in ‘real markets’ there is. However, in ‘real conditions’ the
simple bargaining model (Muthoo (1999) in Appendix 6.1) will not apply
because of information asymmetry and the lack of information about each
other’s bargaining costs.
If extra-organisational bargaining is adopted as a third alternative, then all

the problems of adverse selection and moral hazard will be present, resulting
in ‘haggling’ and, thus, bargaining costs. Indeed, these conditions which
undermine the market as an appropriate transaction mechanism also

undermine bargaining.
Appendix 6.2 (below) outlines reasons why bargaining between organisations

is likely to fail as a control and co-ordinating mechanism.
But of course organisations often do bargain. Positioning a transaction on the

continuum depicted in Figure 6.1 above is often a matter of ruling out some
sorts of ‘governance’ in favour not of the ‘first best’ but just a superior way of
doing things. (For example, advocates of the behavioural theory of the firm
introduce the concept of bargaining power.)

Pay particular attention to Table 24.6 below where the ‘rational model’ of
organisation (the classical economists’ model) is compared with the ‘political
\model’ (i.e. the power perspective).

The key idea underpinning both the behavioural and political models is that
organisations are coalitions of individuals and various groups which through
their relative bargaining power determine:
1. the operational objectives of the organisation

2. the co-ordination and control of activities.
Notice how this departs from the incentives standpoint. There the
mechanisms which hold people together in pursuit of organisational
objectives are voluntarily entered incentive contracts. The political model,
on the other hand, puts power in this position. Needless to say, real
organisations are usually a bit of both.
H & B contrast the rational and the political models of organisations. This
nomenclature is wrong. A rational approach to bargaining is perfectly feasible.
Furthermore, people may actually seek power and may actually enter their
utility function/goals/motives, so they can then quite naturally be described as
rationally seeking power.
Psychologists have studied the ‘need for power’ and related concepts. Read
pp 816 – 821 in H & B. This reading (excerpted below) gives an overview of
some of the psychological literature on the motives for power.

6.4 CONTESTED CONCEPTUAL MATTERS
Economists study bargaining power from a game-theoretic standpoint,

which is sometimes rather technically demanding, and sociologists and
psychologists introduce a plethora of, often cross-cutting, concepts. As
organisation theorists we need a picture which is both consistent with the
precepts of bargaining power theory and which slims down the sociologists’
and psychologists’ conceptual jungle.
First, it will not have escaped notice that bargaining power theory detects the
presence of power in the ability of actors to determine the division of a
bargaining surplus according to their differing interests, whereas sociologists
tend to see power as an inter-actor concept – the degree to which one actor
can gain the compliance of another when the latter has differing objectives/
interests to the first. This difference in focus should not cause concern. (H &
B’s broad definition of Power: the capacity of individuals to overcome
resistance on the part of others, to exert their will and to produce results
consistent with their interests and objectives.)
Consider M and L bargaining over a wage rate once again. They arrive, given
their relative bargaining power, at an ‘agreed rate’. Then if M can get L to
work at that rate we can quite naturally speak of their relative interpersonal
power. In practice, of course, with incomplete contracts and moral hazard this
may not be realisable and bargaining power may be further involved. Recall
that for any of this reasoning to be applicable there must, from an economist’s
point of view, be room for bargaining in the first place – that is, some
departure from perfectly competitive conditions.
So let us look more closely at the inter-actor conception and continue to

motivate the argument in terms of the relationship between M and L. How
can M gain L’s compliance and, thus, control and co-ordinate their activities
in ways that are distinct from M providing incentives (not only financial
ones)?

Distinguish the following types of mechanisms:
• force
• power
• inducement
• influence or persuasion
• authority.
6.4.1 Force
This implies actual physical constraint: M is able to gain L’s compliance
using physical means. Note that this is not the same as using threats of
physical compulsion. Gaining compliance by force is not usually part of
organisational life except perhaps in extreme conditions – in prisons, for
instance.
6.4.2 Power
M is able to gain L’s compliance by the use of threats (negative sanctions),
including, possibly, the threat of force.
6.4.3 Inducement
M is able to gain L’s compliance by the use of rewards (positive sanctions).
But this looks like incentives. Inducement is only conceptualised as a
coercive mechanism to the degree that M differentially possesses the
rewards (sources of inducement).
6.4.4 Influence
M is able to gain L’s compliance by changing L’s preferences/perception of
interests/perception of opportunities. Influence can, conceptually, be
subdivided into situations where:
(a) M increases or maintains L’s perception of opportunities, etc.
This covers learning and socialisation and often group pressure.
(b) when M restricts L’s perception of opportunities, etc. This might be

termed coercive compliance or manipulation (or even indoctrination)
and is certainly a species of ‘power’ in the generic sense.

Economists show little sympathy for these sorts of debate, usually regarding
people as being able to ‘freely’ form preferences, perceive opportunities and
recognise their own interests.
6.4.5 Authority
In so far as L sees it to be legitimate that M has relative power / influence /
inducement over him, then the capacity to gain compliance is authority, as
described by Weber.
The process whereby M gains compliance will depend upon M’s expenditure
of resources (sources of power/influence, etc.), which will be costly to M. M
thus incurs compliance costs (compare bargaining costs). One expects the
cost to M of gaining compliance to be reduced to the degree that the
resources available to M as well as M’s possession of them are deemed
legitimate by L.
Notice that contracting in perfectly competitive conditions fits the definition of

inducement. This raises the issue mentioned earlier about the role of ‘power’
in the employment contract. Alchian and Demsetz (1972) write:
It is common to see the firm characterised by the power to settle

issues by fiat (law), by authority, or by disciplinary action superior to
that available in the conventional market. This is a delusion. The
firm does not own all its inputs. It has no power of fiat, no authority,
no disciplinary action different in the slightest degree from ordinary
market contracting between any two people. I can ‘punish’ you only
by withdrawing future business or by seeking redress in the courts
for any failure to honour exchange agreement. This is exactly
all that any employer can do.
Thus, for these authors (and for many economists) the move from market
to organisation is not one which introduces or fundamentally changes

‘power’ relationships, i.e. Alchian and Demsetz feel that power relationships in
organisations are no different to those in markets.
Can we make this picture consistent with the sociologists’ perspective? First,
we must consider what are ‘real markets’. When the conditions for complete
contracting are present there is no real choice between organisation and
market. Most economists would say that ‘power’ is not involved at all. Some
Marxist sociologists however would associate power differentials with
inequality of resources (‘sources of power’) brought to the transaction – be it
in a market or organisation.
So, for those sociologists, transactions at any point on the market–

organisation continuum are always a species of power relations except when
the resources they bring to the transaction are ‘equal’. In the context
of markets, at competitive equilibrium, all would then have identical
purchasing power. But in the context of ‘real markets’ is there any reason to
think (in opposition to Alchian and Demsetz) that ‘power’ is more involved in
hierarchical organisational contracts than (imperfect) market contracts?
Clearly most sociologists believe that employment contracts are built around
direction, threats and, thus, power play. Economists like Alchian and
Demsetz note that employment contracts are voluntarily entered into and,
therefore, not apparently a species of ‘power’ relationship.
Perhaps the way to resolve this impasse is to note that employment

contracts are ex ante (as a result of something done before) in competitive
environments voluntarily entered into, but with the full recognition that they
involve ex post (after the fact) direction or being subject to authority or power.
6.4.6 Agreement between Economists & Sociologists

a. Both picture actors as satisfying self interest at others’ expense
b. Both emphasis ‘sources of power’

• Economists – resources impacting patience, risk aversion

• Sociologists – resources as sources of power but norms also
c. Both emphasis ‘outside options’

• Sociologists – reducing dependence
• Economists – impact on bargaining surplus
d. Both see information (who knows what) as central:

• Sociologists – source of power
• Economists – learning, credible communications etc, links into
game theory
e. Conclusion (Abell): Economists picture much more powerful and

capable of systematic growth (but read Miller, Managerial Dilemmas, Chap 2).
6.5 GROUPS AND POWER

Groups – even organisations – can influence human activities, and vice
versa. Psychologists have studied these processes more closely. They speak
of group pressure and individual leadership but also use many other terms.
We have already encountered the Hawthorne effect.
Chapter 11 in H & B refers to power when the authors are actually thinking in
terms of influence (i.e. group processes changing people’s perceptions,
beliefs and attitudes). These ideas to a degree overlap the content of the next
chapter on culture.
The big story in H & B is that actors can derive their way of behaving in
organisations from the groups they are members of. They derive self-esteem,
social identity and the esteem of others in so doing. Esteem may, to use the
economists’ term, be arguments in their utility functions. If we can understand
the way in which group membership shapes individuals’ preferences / motives,
then we have an endogenous theory of these dispositions (rather than an
economist’s exogenous view).

The interesting question is whether these complex mechanisms can be put to
good use in co-ordinating and controlling activities in organisations. Group
processes can both facilitate and undermine organisation objectives:
• Established groups can influence individuals’ activities.
• Individual activities are based upon:
– individual beliefs, including perception of feasible opportunities
– individual values
– individual affects.
• So groups can influence individuals’ activities by socialising any of
these.
Groups and even entire organisations can evolve norms about the
appropriate way to act and new group members are then socialised into
conformity. The group may impose positive and negative sanctions upon
those who deviate. Group conformity can even induce what psychologists call
deindividuation.
6.6 GENDER AND POWER
It is sometimes suggested that organisational life reflects male dominance,

and theory and description are accordingly not gender neutral. This approach
to organisations is part of a much broader critique of both society and the
social sciences as serving the interest and power of the male gender. This
shows up particularly in: (1) job design and (2) unequal opportunities for
women. There is also strong statistical evidence that in many societies
women earn, on average, less than men – even for the same job; though the
disparity is reducing in most countries. But why is this pattern observed?
A number of explanations have been proffered for gender disadvantage:

1. Certain jobs which attract lower incomes are regarded as more
appropriate to women – there may be strong norms to this effect. Even
women may regard these as legitimate and not aspire to promotion, etc. So
the query shifts towards the evolution of these norms and their legitimacy.
2. Because women are often temporarily absent from the labour force for
child rearing they may be less attractive to employers.
3. Women have different values about co-operation and competition

and organisational life with regards to male values (notably more
competitive). Women may also not ‘network’ as effectively as men and
networking improves prospects.
The question one might ask is – if women were to design the control and co-
ordination system of an organisation, would it be different from male-
dominated organisations?
All organizational activity and all research are ‘gendered’;

one cannot avoid ‘doing gender’ in organisational research.
Mills and Tancred (1992)
6.7 MARXISM AND POWER
Marxism construes productive organisation structures as a form of

domination. In capitalist societies it is capital that dominates labour. The
employment contract is objectively exploitative in the sense that, according
to the labour theory of value, capital expropriates (pockets) labour’s value
creation. In so far as labour fails to recognise its exploited status, it suffers
false consciousness, i.e. it is (ideologically) manipulated by capital.
Thus productive organisations – the tools of capitalism - are the source of

class dynamics in society whereby labour comes to recognise its exploited
status and eventually mobilises to change society. Within the framework of
this grand story, organisation theory should chart the micro conflict and
bargaining between capital and labour.
Scholars working in the Marxist tradition often speak of ‘hegemonic culture’,
implying that culture (languages, beliefs and values) plays a coercive role
within both organisations and wider society.
6.7.1 Braverman
Braverman’s (1974) Labor and Monopoly Capital analysis had suggested that
scientific management / Fordism, in de-skilling labour, increases the power of
capital. Braverman predicted that de-skilling would be extended to white-collar
workers and eventually to management. So, organisation theory itself, which
interprets these trends as purely in pursuit of efficiency, becomes one
ideological means of maintaining the supremacy of capital and we should
accordingly search for an alternative radical theory which has the objective of
eliminating exploitation and liberating labour.

Empirical evidence does not lend support to Braverman’s Marxist-inspired
predictions. Re-skilling often takes place alongside de-skilling and the
differentiation in skills among workers is complex and not adequately
pictured in any simple model. It is probably true, however, to say that these
complex and ill-understood processes are shaped by bargaining and, thus,
shifting balances of power between different levels of management and
various groups of workers.
6.7.2 Lukes
Drawing conceptual boundaries between these various concepts (often
named in various ways) causes much philosophical wrangling. The idea that
language and discourse can be a source of ‘power’ is closely related to these
distinctions, as is the concept of ideology. The Marxist conception (see below)
whereby the ruling ideas are the ideas of the ruling class also fits this
conceptualisation. Whether one should think in terms of the manipulation of
preferences or interests or opportunities or, indeed, beliefs, values and affects
which underpin them is a debatable point. According to Lukes (2005), A
Radical View of Power:

6.7.3 Foucault
Michael Foucault looks at power and its dominant role in the construction of
subjects. He focuses on disciplinary power, where the construction of subjects
(‘subjectivation’ of the self by those in power) is to make them more
accessible to management control and surveillance (eg prisoner’s behaviour).

6.8 ROLE OF POWER AND ALLIED CONCEPTS IN ORG THEORY
6.8.1 Psychologist/Sociologist position

Few would deny that organisations are often at least in part hierarchical
structures of power and influence – ‘commands down and information for
monitoring up’. Those in a position of power characteristically design the
organisation, appoint subordinates and select a mixture of incentives and
monitoring, and issue threats as appropriate to maintain control and co-
ordination in order to achieve their objectives.
But all of these things can be bargained about and the behavioural theory of
the firm captures the idea whereby multilateral bargaining (at the moment
there are no adequate theories) among a wide range of stakeholders
determines the outcome.
6.8.2 Economist position

Contrast this picture with the classical theory of the economist’s firm operating
in perfectly competitive markets. This theory has very little to say about
organisation design – firms are black boxes compelled to operate in a manner
which benefits their principals if these firms are to survive.
In this abstract world there is no call to evoke any concept of bargaining or

power or any related concepts. However, some scholars would say that the
exogenous assets that in theory people are endowed with and bring to
competitive markets are sources of differing power (purchasing power).
Indeed, some would go so far as to construe differing genetic endowments –

for which we cannot claim any responsibility – that confer power. You need to
think about these issues though they will remain ‘fundamentally contested’.

2020 / Q4: Some argue that there are power relations in
an organisational hierarchy and some do away with this
assumption. Explain the controversy and its
implications. Under which conditions is it reasonable to
adopt or reject this assumption and why?
2021 / Q4. Consider how the economists’ concept of

bargaining power compares to theories of power in
organisations from other social science approaches. Provide a concrete example of
bargaining to describe how these concepts relate to your own personal experience.
A07/Q8: What role should the concept of ‘power’ play in the analysis of
organisations?
(Answer in this Chapter, stressing contested nature of power concepts and bargaining
power. Reference to Appendix 6.1 - 6.2, as well as Chap 6.8 on incentives is helpful.)
B08 / Q6: Identify and explain the function of at least two sources of bargaining
power; are these sources important in organisations? Discuss.
B08 / Q8: Drawing on organisation theory, critically appraise the contention that
women and men would take materially different approaches to the design of an
organisation’s coordination and information system.
B15 / Q4: What types of power might exist, according to economists, in markets?
How do they compare to the way sociologists think of power?
ClosingThot

LECTURE 11 / C7: CULTURE
Essential reading
H & B Chapter 19
D and S Sections 5.5.1 and 8.8.2
Richardson and Boyd’s article
Aim of the chapter

To understand how various components of ‘organisation culture’ can
contribute to organisation control and co-ordination.
7.1 INTRODUCTION
Cultural factors can have an impact upon individual motivation and thus affect
organisation design. A problem, however, is that the idea of culture itself is
used to cover so many different phenomena – thus, definitions abound.
Economists have given the term ‘culture’ scant attention but they have
developed a remarkable literature on trust, a concept which many would
incorporate into a definition of culture. It is to sociologists and to a lesser
extent psychologists that we have to look for inspiration. But in addition,
management theorists have also latched on to the idea whereby corporate
culture can have an impact upon corporate performance.
Much of the writing in this area is very diffuse; the research upon which it is
based leaves a great deal to be desired and it does not always come up to
the standards of modern social science.
The literature covered by H & B is rather descriptive and captures well

the diversity of conceptualisations. The description of the five polar
contrasts is a useful way of bringing some order to a chaotic field:
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Managerial Social Science
(Objective reality, sui (Subjective reality –
generis -empirical) Interactionism, eg Mead)
Culture has Culture is
Integration culture (similar Differentiation culture
to structural-functionalism in versus
sociology)
Consensual culture (similar Fragmented culture
to structuralism –
consensus theory in
sociology, eg Parsons)
Culture managed Culture tolerated
Symbolic leadership (eg Management control (eg
rank, appointment/title) Braverman –control thru
production culture)
C7 Culture 179
Despite the diversity there is a common theme underlying the various
approaches to organisation culture which centres our attention upon the
sources of co-operative activity. In the context of our definition of
organisation, in terms of the control and co-ordination of symbolic resources
and activities, we can see organisation culture as one mechanism among
others for achieving this objective.
Source: Kirkpatrick, I. (2013)
Of course, cultural factors can also create patterns of co-operation which are
unfavourable to organisation objectives. Indeed, in the context of the
behavioural theory of the firm, each stakeholder group could conceivably co-
operate in pursuit of its own bargaining power. It is probably useful to
distinguish between cultural factors that are generated (evolve) within an
organisation (probably at a cost) and those that derive from the ambient
culture(s). Hofstede’s approach to national cultures covers this issue about
ambient culture:
C7 Culture 180
• Management theorists tend to emphasise commitment to either the
objectives of entire organisations or to various groups or departments.
This can involve issues of altruism (i.e. positive ‘ other-regarding).
C7 Culture 181
• Sociologists concentrate upon common beliefs (including tacit
assumptions), values and affects, often embodied in social norms.
They may also refer to social institutions.
• Economists tend to emphasise trust and reputation effects in repeated

exchanges with incomplete contracts and, thus, moral hazard.
When trying to synthesise these apparently diverse approaches, you could

say that cultures are mechanisms that increase the probability of cooperative
behaviour among a number of individuals. The scope of the mechanism then
C7 Culture 182
depends upon which individuals/roles are involved – a group, a department,
an entire organisation and so on. Applying the ideas to roles rather than
specific individuals would facilitate the idea of institutionalised culture. So, on
this reading, cultures are mechanisms for handling adverse selection and
moral hazard problems.
ADVERSE SELECTION → CULTURE  MORAL HAZARD
CONTRACT
You should note this is a restrictive definition but one which fits well the
purposes of organisation theory. Also, cultures that undermine co-operation
can obviously exist but these would presumably not contribute to the co-
ordination and control of activities.
7.2 TRUST
The basic idea here is that both the pre-contractual and post-contractual
hazards can, in principle, be overcome if the parties can trust each other
not to take advantage (i.e. not to behave opportunistically).
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C7 Culture 184
C7 Culture 185
The issues at stake can best be analysed in terms of a simple ‘help’ or ‘trust’
game as depicted in Figure 7.1.
The game is a truncated form of the prisoner’s dilemma with which you are
already familiar. You will be able to see straight away that the Nash
equilibrium (0,0) when the game is played once, is mutual non co-operation /
help because the first mover cannot trust the second mover to co-operate
when it is his/her turn to move. So the first mover anticipates this and does
not co-operate. As a consequence the second mover certainly won’t co-
operate. The game is set up as one of perfect and complete information. Not
surprisingly, the Pareto-efficient outcome (1,1) is not, at this juncture,
achievable.
7.2.1 Bilateral reciprocity

You might like to think about this game in rather more general terms than
those pertaining to formal contracts. Organisations, for their smooth
functioning, often depend upon mutual help. I help you now, believing you will
help me in the future when I need it. If people are self-interested in the way
that game theorists start by assuming, then no help will be offered – the
reasoning entirely parallels the precepts of the trust game. A helping culture
will not evolve although you and I could both be better off if we could find
some way of overcoming the hazards and introducing such a culture. The first
mover (helper) needs to trust that the second mover will reciprocate by
C7 Culture 186
helping when needs be. If they can, then the Pareto-efficient outcome is within
reach.
Indeed, the problem can be re-described as one of achieving a relationship of

bilateral reciprocity. It might be useful to think of the helping culture as an
informal mechanism of bilateral reciprocity.
7.2.2 Altruistic trust
How might the first mover trust the second mover to reciprocate? If the
players are to play the game repeatedly with a reasonable probability, then
co-operation can be achieved (Tit For Tat, the folk theorem etc.). It is
debatable whether the term ‘trust’ is appropriately used in this context. After
all, the reasoning underlying the dynamics of an iterated game depends
entirely upon the rational self-interest of the players. Some would want to
preserve the term ‘trust’ for situations where people will reciprocate even if it
is not in their self-interest to do so. We might call this altruistic trust (we will
return to altruism below). This is a conception which is closely allied to the
psychologists’ use of the term ‘commitment’ (not the economists’ notion of
‘credible commitments’).
Both trusting and being trustworthy can of course be described as values.

Furthermore, the outcome of trust games depends upon the beliefs that the
first mover (trustor) has about the trustworthiness of the second mover (the
trustee). So the approach we are adopting is inherently compatible with the
basic sociological interpretation of culture as co-operative beliefs and values.
It is important to distinguish between being able to trust another’s motives and

his ability / skill to realise certain objectives. I can trust that you will intend to
reciprocate and quite independently take a view on whether you are capable
of doing so. A trusting culture requires both sorts of trust.
C7 Culture 187
It can be argued that organisational and some quasi-organisational
exchanges like long-term contracts are, unlike market exchanges, constructed
to sustain repeated interactions. Organisations can accordingly aspire to fill
the gaps in incomplete contracts with trust. If organisations can rely upon
recruiting members from an ambient culture where norms of trustworthiness
are widespread, then it may be able to operate with a trusting culture even in
the absence of long-term relationships. It is sometimes suggested that the
success of the Japanese economy a couple of decades ago was so reliant.
7.2.3 Reputations and Generalised Reciprocity
Reputations for trustworthiness can also play a role in order to generate a

sense of ‘helping cultures’. In a population of individuals it may be important to
build a reputation for trustworthiness if third parties can observe others
interact.
The other way in which co-operation can be sustained in the trust

situations is by command or authority. We can envisage one of the parties
or a third party enforcing the Pareto-efficient outcome. We would, of
course, not regard this as involving trust but a power mechanism.
The picture so far only scratches the surface of the complexities of cultural
mechanisms. One important transition an organisation can make is from a
reliance upon bilateral reciprocity to generalised reciprocity. Thinking in terms
of a helping culture once again, bilateral reciprocity can be sub-optimal. If,
initially, A helps B, then when subsequently A needs help, B may not be free
to help A – it would be better if ‘somebody’ in the organisation helped B. As
such, generalised reciprocity is an inter-temporarily distributed asset available
to a social group and may be appropriately conceived as a form of social
capital. Most social systems come to depend not upon bilateral but
generalised reciprocity. This transition is one that is most important tp the
durability of any social collectivity (i.e. society).
C7 Culture 188
This situation is generalised reciprocity and is depicted in Figure 7.2 below:
Free Riding
Clearly the problem of free-riding is exacerbated in moving from bilateral
to generalised reciprocity. Individuals can free ride on the group. But again
repeated interaction can find a co-operative equilibrium.
Although, as the term ‘corporate culture’ implies, facets of culture have

traditionally been interpreted as mechanisms for maintaining co-operation
within organisations, it is now recognised that these mechanisms can operate
between co-operative organisations at differing positions on the market–
organisation continuum. Furthermore, even though corporate culture is largely
conceived as a co-operative mechanism (i.e. offsetting the problem of
incomplete contracts, team production, externalities, and so on), it is also
C7 Culture 189
recognised that the performance of organisations can also depend upon intra-
organisational competition between individuals (eg promotion) and groups
and departments. It may be useful consequently to picture corporate culture
as a mechanism for maintaining the optimum mixture of co-operation and
competition within an organisation or group of organisations.
7.3 NORMS, INSTITUTIONS
Cultures are often conceived as comprising social norms which impact upon
activities and thus organisational control and co-ordination. Social norms
are rules about appropriate activities – what one should and should not do
in specified circumstances – but they are special sorts of rules.
a. They are social in the sense that they are shared by a
community.
b. They are institutionalised to the degree that their violation
carries negative sanctions.
c. They are internalised to the degree that their violation induces a
sense of unease, shame or guilt (internal sanctions).
Clearly an organisation’s objectives could be rather easily achieved if the

Weberian rules or the algorithm (i.e. a logical problem-solving procedure)
were to be internalised.
We have encountered the idea of norms earlier, in particular as constituents

of social roles attached to social identities. Social norms (or more likely
collections of norms) are sometimes referred to as social institutions. All
social scientists believe that some human activities, both inside and outside
organisations, are shaped by social norms. They differ, however, in their
interpretation.
a. Broadly speaking, economists will analyse social norms as

‘rules’ which evolve in situations which are repeatedly encountered, in
order to facilitate optimal, self-interested behaviour (or interaction in a
game-theoretic sense). They thus interpret them as an extension of the
C7 Culture 190
basic precepts of rational choice.
b. Sociologists – notably Elster (1989) – find this simple
assumption lacking. He argues that the evolution and compliance with
many social norms:
• cannot be derived from self-interested precepts
• are not optimal.
This opens the way to a very different interpretation of the role of social norms.
They become influence mechanisms. Marxists, in particular, construe social
norms as part of the machinery of ‘domination’ whereby one group (capital)
maintains its ‘hegemony’ over another (labour).
7.4 ALTRUSIM AND COMMITMENT
Most economists and many sociologists and psychologists conduct their

analysis assuming that individuals are self-regarding or self-interested. To use
the economists’ term, they only gain utility from their own personal welfare.
The support of evolutionary biology, which traditionally also figures self-
interest, is sometimes evoked to justify this assumption. More recently,
biologists have explored the idea that altruism can arise through evolutionary
C7 Culture 191
selection. Although still controversial, an affirmative answer is often now given
to this question involving an equally controversial idea of group selection.
Altruism is a disposition whereby individuals gain welfare from the welfare of

others even at a cost to themselves. Sometimes participative altruism, where
costs to self are involved, is distinguished from the non-participative version
where only a passive welfare from others’ good fortune is recognised.
If we entertain the possibility of altruism in organisational life (e.g. obtaining

welfare from the success of the organisation in achieving its objectives, or
perhaps more restrictedly, groups or individuals within an organisation) then
we might also recognise that ‘spite’ (malign intent) may be involved. That is to
say, gaining welfare from the misfortune of the organisation, etc.
Notice that in some sense the assumption of self-interest is in a ‘neutral’

position between the extremes of spite and altruism. You might like to
think in terms of a motivational continuum running between these
extremes with self-interest in the middle.
Altruism → Self-interest → Spite

other-regarding self-regarding other-regarding
There can be no doubt that the ‘other regarding sentiments’ play an

important role in many organisations, though they are rarely incorporated
into models of organisational control and co-ordination. In particular, if
altruistic norms can be engendered (perhaps at a cost) then this should
reduce control loss, the need for monitoring, power and directives and so
on. This, in turn, will increase spans of control and bring down administrative
costs. Needless to say, all of these mechanisms could be used to invalidate
an organisation’s objectives or used by ‘coalitions’, in the behavioural theory,
to generate coalition co-operation.
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7.4.1 Cultural evolution (Richerson and Boyd)
Human Cooperation Is Extensive and Diverse. Human patterns of cooperation
are characterized by a number of features:
• Humans are prone to cooperate, even with strangers. Many people

cooperate in anonymous one-shot prisoner’s dilemma games and often vote
altruistically. People begin contributing substantially to public goods sectors in
economic experiments. The experimental results accord with common
experience. Most of us have travelled in foreign cities, even poor foreign cities
filled with strange people for whom our possessions and spending money are
worth a small fortune, and found risk of robbery and commercial chicanery to
be small. These observations apply across a wide spectrum societies, from
small-scale foragers to modern cities in nation states.
• Cooperation is contingent on many things. Not everyone cooperates.

Aid to distressed victims increases substantially if a potential altruist’s
empathy is engaged. Being able to discuss a game beforehand and to make
promises to cooperate affects success. The size of the resource, technology
for exclusion and exploitation of the resource, and similar gritty details affect
whether cooperation in commons management arises. Scientific findings
correspond well to personal experience. Sometimes people cooperate
enthusiastically, sometimes reluctantly, and sometimes not at all. People vary
considerably in their willingness to cooperate even under the same
environmental conditions.
• Institutions matter. People from different societies behave differently

because their beliefs, skills, mental models, values, preferences, and habits
have been inculcated by long participation in societies with different
institutions. In repeated play common property experiments, initial defections
induce further defections until the contribution to the public good sector
approaches zero. However, if players are allowed to exercise strategies they
might use in the real world (e.g., to punish those who defect) participation in
the commons stabilizes, even in one-shot (nonrepeated) contexts. Strategies
for successfully managing commons are generally institutionalized in sets of
C7 Culture 193
rules that have legitimacy in the eyes of the participants. Families, local
communities, employers, nations, and governments all tap our loyalties with
rewards and punishments and greatly influence our behavior.
• Institutions are the product of cultural evolution. Richard Nisbett’s

group have shown how people’s affective and cognitive styles become
intimately entwined with their social institutions. Because such complex
traditions are so deeply ingrained, they are slow both to emerge and decay.
Many commons management institutions have considerable time depths.
Throughout most of human history, institutional change was so slow as to be
almost imperceptible by individuals. Today, change is rapid enough to be
perceptible. The slow rate means that different populations experiencing
the same environment and using the same technology often have quite
different institutions.
• Variation in institutions is huge. Already with its very short list of

societies and games, the experimental ethnography approach has uncovered
striking differences. Plausibly, design complexity, coordination equilibria, and
other phenomena generate multiple evolutionary equilibria and much
historical contingency in the evolution of particular institutions; consider how
different communities, different universities, and different countries solve the
same problems differently.
Conclusion
The processes of cultural evolution quite plausibly led to group selection being
a more powerful force on cultural rather than genetic variation. The cultural
system of inheritance probably arose in the human lineage as an adaptation
to the increasingly variable environments of the recent past. Theoretical
models show that the specific structural features of the cultural systems, such
as conformist transmission, have ordinary adaptive advantages.
We imagine that these adaptive advantages favored the capacity for a system
that could respond rapidly and flexibly to environmental variation in an
ancestral creature that was not particularly cooperative. As a by-product,
C7 Culture 194
cultural evolution happened to favor large-scale cooperation. The cultural
explanation for human cooperation is in accord with much evidence, as
summarized by stylized facts about human cooperation. More detailed
surveys may be found in Richerson and Boyd (1999, 2001).
7.4.2 Culture and leaders

Schein explores the possible links between corporate cultures and the role of
transformational leaders. Management theorists from Smircich to Ouchi uphold the
view that culture is a lever for change which senior management could use to
influence employees. Smircich (1983) has analyzed different conceptions of
organizational culture. The studies can be divided into two areas; organizations have
been regarded as cultures (‘is’ approach) or having a culture (‘has’ approach). In the
latter culture is a feature belonging to an organization. Culture is an instrument
satisfying certain needs, or an adaptive and regulative mechanism. Culture is seen as
controllable by management and contributing to the overall balance and
effectiveness of an organization. For Schein, there are three levels of culture. They
provide followers with a focus and commensurate levels of support, involvement,
and appreciation designed to encourage the follower to adopt the leader's vision as
their own and be committed to making it a reality.
C7 Culture 195
CRITICISMS OF CULTURE: Kotter & Heskett (1992) on corporate culture
and performance:
A final note for this Chapter: there is a branch of game theory – evolutionary
game theory – which is analytically useful in understanding the evolution of
altruism and commitment (→ Chap 9).
PLEASE NOTE THAT ASSIGNMENT 2

BASED ON CHAPTERS 4 AND 6 WILL BE
CONDUCTED IN THE NEXT LECTURE.
(Model answers for submissions only.)
C7 Culture 196
A07/Q5: What is the relevance of game theory

to the analysis of corporate culture?
(Answer in this chapter. In addition, a Prisoner’s
Dilemma trust game explained in Box 8.5 and
illustrated in Figure 7.2 is useful.)
A07/Q7: What is the significance of ‘free-

riding’ in the analysis of the control and coordination of organisations?
(Answer in this Chapter, using Prisoner’s Dilemma to illustrate free-riding or
shirking. Solutions are in Chapter 7.2 using monitoring, repeated play, power
authority and helping culture. Other mechanisms can also be explored.)
B08 / Q9: What significance does game theory have for analysing corporate
culture?”
2020 / Q5: Explain the difference between additive and non-additive tasks (such as
conjunctive and disjunctive tasks). How might the corporate culture affect the
performance of these tasks?
2021 / Q5: “The key to obtaining sustained competitive advantage is to design an

appropriate corporate culture.” Discuss.
Closing Thot
C7 Culture 197
LECTURE 12: REVIEW AND TEST 1
REVIEW A
ANSWERING OTIA EXAM QUESTIONS IN 2016
General Comments
1. Some candidates failed simply because they answered two or three
questions instead of four. Remember: even if you are not sure what to write,
always attempt to answer four questions. Read the entire question carefully,
paying attention to all words and concepts used in the question instead of
sticking to just one concept. Take a moment to reflect on what is required.
2. Engage. Higher marks in essays are awarded for engaging with the
material, as opposed to simply describing relevant theories from the subject
guide or Essential reading. Make sure you do not go off topic, focusing on
other theories that are not obviously connected to the question. For example,
if a question is in two parts, it is necessary to address both parts equally. Or if
questions ask about advantages or disadvantages of a particular theory,
these need to be addressed equally.
3. For each question you should aim to identify and define at least three
relevant concepts appropriate for the question. Each outline answer contains
multiple concepts. These concepts are defined in the subject guide and
Essential reading. Although the outline answers do not include definitions, in
the examination, candidates are expected to choose at least three of the
concepts and define them in their own words.
Writing
1. Provide a clear introduction and narrative structure in your essays.
Such introductions are most effective, when they demonstrate how you intend
to answer the question. The introductory paragraph should set the scene by
identifying key issues and concepts and outlining what you will say in the body
of your essay.
Review and Test 1 198

2. Your writing can be further improved by using more signposting (for
example, at the start of new paragraphs) to direct the reader and explain how
the argument will unfold. Do not simply list theories and/or empirical evidence.
You should indicate the most important issues and how they shed light on
your argument.
3. A concluding discussion is needed, summarising your answer in a

paragraph or two. The final paragraph of your essay serves to synthesise your
ideas, summarise the main points of your argument and provide a conclusion
on the basis of the material covered. It can be helpful to refer your conclusion
back to the introductory paragraph, demonstrating that you have indeed
presented the argument as you planned to at the very beginning.
Question 1
Zone A/ B (Same question)
What are the differences between control mechanisms and coordination
mechanisms? How are these mechanisms affected by various
information problems?
Reading for this question

Subject guide, Chapter I.
Buchanan, D. and A Huczynski Organizational behaviour: an introductory text.
(London: Prentice Hall 2010) seventh edition [ISBN 9780273728597] Chapter
1.
Douma, S. and H. Schreuder Economic approaches to organizations. (London:
Prentice Hall, 2008) fourth edition [ISBN 9780273681977] Chapters 3 and 4.
Approaching the question

Control mechanisms are the means by which the actions of actors are
motivated in order to achieve the objectives of the organisation.
Coordination mechanisms are the means by which the
actions/behaviours of actors are brought into alignment with each other in
order to achieve the objectives of the organisation. Whereas control looks at

the management of individual actors, coordination looks at the management
of the webs of relationships between those actors (managing social capital).
Control mechanisms are often said to exist within P–A relationships
(usually, but not necessarily, within an organisation) whereas coordination
mechanisms focus on networks of interdependent units, either within an
organisation (between units in a vertical-integrated company, for example) or
between organisations. Examples for control mechanisms include the various
P–A contractual arrangements (rent/franchising, pay-by-effort, pay-by-result,
etc.), participatory/democratic mechanisms, power and culture mechanisms,
whereas coordination mechanisms include the price in an ideal market. Within
organisations, one would consider the analysis of mutual adjustment
(Mintzberg), standardisation, corporate culture, institutions, etc. A discussion
of possible overlaps between the concepts, or the utility of the distinction may
be appropriate.
The need for control and coordination mechanisms derives from the
need to regulate transactions and to solve various information problems, such
as hidden information or hidden action, uncertainty or complexity. From here,
D & S (Chapter 4) arrive at the conclusion that organisations and institutions
arise as a solution to information problems. Issues that involve hierarchies
could be highlighted, such as information/control loss, bureaucracy, rules,
formalisation, standardisation and the problem of discretion.
(End)
Three writing approaches

1. List the various types of control and coordination mechanisms and
explain their relation to information problems.
2. Focus on spans of control and contrast them with spans of coordination
(hierarchical vs. horizontal relations).
3. A more advanced approach: make a critical analysis of the various
ways in which economists and sociologists conceptualise the notions of
information and control vs. coordination. For example, control in economics
(P–A, incentives, monitoring, etc.) and control in sociology (e.g. process and
content theories).

TEST 1
As your assignment is based on Chapters 2 and 3, Test 1 will be based on
Chapters 4 (Motivation theories) and 6 (Power). There will be two questions
for you to choose one from. It is suggested that you study both topics to prime
yourself for the exam.
As your actual exam comprises 4 questions in three hours (or 45 minutes per
question), this test will require you to complete the selected (one) question in
45 minutes.

Lecture 9 / C5: Incentives, Groups and Teams: Submission of Assignment 1

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LECTURE 9 / C5: INCENTIVES, GROUPS AND TEAMS

Aim of the chapter

C5 Incentives, Groups and Teams 122

Weakness with Decision Tree approach:

C5 Incentives, Groups and Teams 124

In addition to its academic interest, game theory has received attention in

Although some game theoretic analyses appear similar to decision theory,

C5 Incentives, Groups and Teams 125

In the previous chapter we studied individuals; now we turn to groups (the

Game theory, as the pre-eminent theory of strategic interaction, is central to

5.2 THE ECONOMISTS’ CONTRIBUTION

Team production formally means: the output of a group of individual agents

C5 Incentives, Groups and Teams 130

C5 Incentives, Groups and Teams 133

5.2.1 Prisoner’s Dilemma

DEFINITION: The normal (or strategic form) game is usually represented

When a game is presented in normal form, it is presumed that each player

C5 Incentives, Groups and Teams 134

AGENT (A) - second mover

P’s best outcome is (4,1) : P slacks (defects) while A co-operates.

Nash equilibrium is (2,2):

b. A as first mover: The same Nash equilibrium outcome would result

C5 Incentives, Groups and Teams 135

• Repeated interactions (such as tit-for-tat (TFT): the strategy that a player

• Self-managed co-ordination, i.e. peer group management or

• Cultural co-operative norms preventing shirking or enjoining credible /

• A specialised monitor motivated by residual remuneration with the ‘power or

C5 Incentives, Groups and Teams 136

5.2.2 The behavioural theory of the firm

C5 Incentives, Groups and Teams 137

C5 Incentives, Groups and Teams 138

C5 Incentives, Groups and Teams 139

C5 Incentives, Groups and Teams 140

C5 Incentives, Groups and Teams 141

Social psychologists have been at the forefront in understanding the

Organisations can often be analysed as a structure of groups and it is

C5 Incentives, Groups and Teams 143

1. They distinguish a group from an aggregate of individuals. Groups are

2. The Hawthorne studies, designed to test the efficacy of Taylorism,

• the Hawthorne effect is now widely recognised in social science

• informal organisations/groups are also recognised as a universal aspect of

• informal norms can have a either a positive or negative impact upon

C5 Incentives, Groups and Teams 144

C5 Incentives, Groups and Teams 145

C5 Incentives, Groups and Teams 146

C5 Incentives, Groups and Teams 147

Group communication is expected to be incomplete but strongly connected.

C5 Incentives, Groups and Teams 148

Once again, notice that the expectations can be envisaged as a structure of

Role analysis is sometimes suggested as an alternative to rational choice

If there happened to be contradictory expectations (e.g. if a father and mother

This picture of the control and co-ordination of activities, in the absence of

C5 Incentives, Groups and Teams 149

In particular, try to characterise sociology’s advice teams, action teams,

C5 Incentives, Groups and Teams 150

B08 / Q7: Describe the main

P09 / Q4: Under what conditions is team

• Discuss economic theories of ‘team production’, the problem of shirking. Include

• Discuss sociological and psychological theories of teams, in particular, the work of

C5 Incentives, Groups and Teams 152

C5 Incentives, Groups and Teams 153

Aim of the chapter