A Simple Model of Why Change is Hard

Finance

Speaker:Benjamin E. Hermalin, University of California, Berkley
Date: Tuesday 14 May 2019
Time: 13:45 - 15:15
Location: Xfi Henderson Lecture Theatre

Further details

A key issue in the management or governance of any enterprise is how to effect change. Whether due to exogenous shocks, altered en- vironments, or endogenous reasons, such as mergers and acquisitions, organizations often need to implement new strategies, processes, and ways of operating. Yet, as has been well-documented and well- studied, organizational change is difficult; enterprises often fail to change successfully, resulting in signi cant losses, even bankruptcy or dissolution. Further, this problem seems greater for larger orga- nizations than smaller ones|smaller ones, such as startups, often being seen as more nimble. Why is this? This paper considers an environment in which nearly all the impediments to change often noted in the literature are absent, yet nds that organizations will still typically fail to achieve the rst best in terms of the likelihood of successful change and that this discrepancy from the rst best is typically greater the larger is the enterprise. Although incentive contracting may ameliorate some of these problems, it will generally not solve them nor, in many contexts, will it undo the disadvantage larger organizations have effecting change vis-a-vis smaller ones.