Cooperation Within the Entity of the Firm

I Introduction PRESSURES are growing for economists to account for productive behavior within the firm, without depending on appeals to monetary rewards and supervision.(1) As Simon (1991, 33), observes, "[I]n most organizations, employees contribute much more to goal achievement than the minimum that could be extracted from them by supervisory enforcement of the (vague) terms of the employment contract." And he asks, "why do employees not substitute leisure for work more consistently than they do?" This paper seeks explanations of productive behavior within the firm, not directly related to monitoring or pecuniary rewards. Employees who do not exploit opportunities to free ride on the work effort of others are defined as "cooperating" in advancing the interests of the firm. So defined, a prisoner's dilemma process dynamic offers an explanation of productive behavior.(2) Such a view of process induced cooperation is compatible with a common perspective on the firm, as a passive entity constrained through choice behavior to voice the exogenously determined preferences of its members.(3) A different perspective on the firm draws on the work of Nelson and Winter (1982) to focus attention on the competencies and capabilities needed by firms in their role as problem-solving institutions. "According to this view, firms are social institutions that develop a body of productive knowledge [cf. Winter (1982)], largely tacit and not codified, with the purpose of doing useful things." (Marengo, 1992). This perspective is consistent with the perception of a firm as an independent entity, that shapes and molds behavior through knowledge embedded in its activities.(4) Here it is argued that in terms of understanding cooperative behavior within the firm, a view of the firm as an institution with an important role to play in knowledge accumulation offers advantages that go beyond the fact of recognizing that the nature of organizations has changed.(5) Such a perspective is not rooted in a specific decision framework. The processes that explain cooperative behavior within the firm are not associated with sharply defined preferences regarding desirable and undesirable actions. Cooperation emerges from learning processes about the actions to be performed. II Accounting for Cooperation in the Presence of Exogenously Determined Preferences ECONOMIC THINKING on individual behavior in the setting of the firm has to a large extent assumed that unproductive behavior ("non cooperative behavior") is inherently appealing.(6) This creates skepticism about explanations of cooperation that are based on assertions about the trustworthiness of employees, or their natural proclivity to behave cooperatively. Indeed, such explanations are often considered idealistic or naive.(7) A repeated prisoner's dilemma game provides an explanation of employee cooperation that does not require the assumption of employee altruism. In a repeated prisoner's dilemma game, an employee's decision to cooperate occurs because of the realization that this strategy is in his long term self-interest.(8) The repeated nature of the interaction is essential for explaining why self-interested individuals, who derive satisfaction from effort avoidance, calculate that it is rational to cooperate. Under certain conditions, threats of retaliation in future periods for slacking off in the current period create a situation where working hard is consistent with self-interest.(9) Although the repeated prisoner's dilemma game has been widely utilized as an explanation of cooperation, alternate explanations to account for cooperation within the firm should be considered. A pressing reason for advancing an understanding of cooperation among employees, that does not depend on a prisoner's dilemma framework, is that there are features of the prisoner's dilemma game that are not organizationally robust. Put simply, there is nothing inherent in the organizational structure of a firm to guarantee its participants offers opportunities whose payoffs correspond with those of a prisoner's dilemma game. …