5. Corporate Culture from an economic perspective

Question 1

economic perspective

Answer 1

• underlying value: maximizing profit
• problem: incomplete contracts
• -> Corporate culture solves this problem. Cultural values serve as a set of local principles
• -> Organizational culture eases cooperation, i.e. increases predictability of others’ actions and in case of unforeseen contingencies

Question 2

Cooperation in a repeated game

Answer 2

- in a repeated interaction defection can be followed by punishment
Payoffs: 
C (Cooperation)
D (Defection)
P (Punishment)
D > C > P

Question 3

Solution to Coordination Problems

Answer 3

• Communication to reduce uncertainty or to negotiate
• Hierarchies or (organizational) authority
• rules, norms (based on corporate culture)

Question 4

Nash-Equilibrium

Answer 4

A Combination of strategies is called Nash-Equilibrium if for each player i si* is a best response to the strategy combination of the other players

Question 5

Pareto-Efficiency

Answer 5

An outcome z’ E Z is Pareto efficient if there is no z E Z which Pareto dominates z’.

Question 6

1/N or free riding problem

Answer 6

the more members there are in a team, the smaller is the share in the gains and losses of one single team member.
Thus, the more team members there are, the lesser a single team member cares about increasing team profit or reducing team losses.

Question 7

How to overcome free riding

Answer 7

• repeated interaction: Defection can be followed by punishment
• monitoring of individual team members
• peer pressure
• norm of cooperation
• team size
• competition between teams
• target based schemes

Question 8

Cooperation problems

Answer 8

• Typically sketched by Prisoners Dilemma

- Dilemma between one Nash equilibrium (individually rational) and Pareto efficiency

Question 9

Coordination problems

Answer 9

• more than one Nash equilibrium in pure strategies
• difficulty is matching other’s strategy to end up in one Nash Equilibrium
• problem is mainly information problem
  Solutions: Supervisor, Communication

Question 10

Corporate Culture generates a competitive advantage

Answer 10

• culture must be valuable to the firm
• culture has to be specific to the firm
• culture must be inimitable

Question 11

Why can it be difficult the imitate a culture?

Answer 11

• norms, values and beliefs cannot easily be described

- the complexity of a culture makes is difficult for others to imitate it

Question 12

How can culture create value?

Answer 12

1. Culture simplifies information processing
2. Culture complements formal contracts
3. Culture facilitates cooperation and reduces bargaining costs

But: a strong culture can make a company inflexible