Social Capital, Corporate Culture and Incentive Intensity

We study a dynamic principal-agent problem where social capital is an important part of the system of incentives. In each period the firm chooses an incentive intensity, and its employees allocate effort between individual and cooperative tasks. Cooperative tasks are within bounds more pro­ ductive than individual tasks, but employees are not monetarily rewarded for them. Rather, and consistent with recent work in experimental eco­ nomics, employees allocate effort to cooperative tasks because they derive utility from cooperation. The utility from cooperation is endogenously de-­ termined, and depends on how much others have cooperated in the past and on the firm's incentive intensity. Consequently, the cooperativeness of the workforce, which we also call the firm's "social capital," follows a dynamic process where the incentive intensity acts as a control variable. We show that the optimal choice of incentives can create cultural differences across firms. *University of Pennsylvania and INSEAD, respectively. We thank numerous seminar audi­ ences for comments on the paper. Special thanks are due to Lars Stole and 2 anonymous referees for thoughtful comments. We retain full responsibility for remaining errors.