Wednesday, June 16, 2010

Reputational Capital and Operational Definitions

The following obviously demands a longer post (or series of posts or articles or maybe a book or two) but I'll throw this out in the hope that someone else will do the work for me.

Rajiv Sethi has a characteristically strong piece on "Reputational Capital and Incentives in Organizations" which includes the following:
How, then, might a firm accomplish the subordination of short term goals to long term objectives in practice? There are two possibilities: one could hire individuals who are predisposed to behave in a principled manner even in the face of incentives not to do so, or one could design compensation schemes that adequately reward actions that preserve or enhance reputation. Economists, being fervent believers in the power of incentives, usually tend to favor the latter approach. But in this particular context, there are two possible problems with this. First, the contribution of any given transaction to the reputation of the firm is generally much more difficult to ascertain and quantify than any contribution to the firm's balance sheet. This makes it difficult to assign reward appropriately. Second, in order to serve as credible commitments to clients and customers, compensation schemes must be easily observable and not subject to renegotiation after the fact. This is seldom the case.
Which leads to today's essay question:

20 points

Are organizations biased toward properties that come with operational definitions? If so, can this bias lead to economically irrational behavior? (if you need extra space you can continue your answer on the back of the blog)

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