A Theory of Organizational Dynamics: Internal Politics and Efficiency

48 Pages Posted: 10 May 2007

See all articles by Hongbin Cai

Hongbin Cai

Peking University - Guanghua School of Management

Hong Feng

University of California, Los Angeles (UCLA)

Abstract

In this paper, we develop a stylized model to study how internal politics affects an organization's hiring of new members and investigate the implications of the dynamic interactions between internal politics and hiring of new members on the organization's long run outcomes and welfare. We consider an organization with a fixed size in which one of the incumbent members retires in each period and the incumbent members vote to admit a candidate to fill the vacancy. Agents differ by quality that is valued equally by every member in the organization. In addition, each agent belongs to one of the two types, where members of the majority type in any period control the rent distribution of the organization and share the total rent of that period among themselves. We characterize the conditions for a Markov equilibrium of the dynamic game, and the long run equilibrium outcome and welfare. Then we solve the model of a three member club with uniformly distributed quality, under both majority and unanimity voting rule in admitting new members. Among other things, we find that "some politics can be a good thing if it is done right, in that under certain conditions the club achieves greater total welfare in the long run in the presence of internal politics than when internal politics is absent, if unanimity voting rule is used to admit new members." Moreover, "too much politics is surely a bad thing, in that the club obtains low welfare in the long run when politics becomes very intense". In that case, majority voting rule is better than unanimity voting rule because the club can suffer more welfare loss from politics under unanimity voting.

Keywords: Internal Politics, Organizational Efficiency, Organizational Dynamics

JEL Classification: D72, D71, C73

Suggested Citation

Cai, Hongbin and Feng, Hong, A Theory of Organizational Dynamics: Internal Politics and Efficiency. Available at SSRN: https://ssrn.com/abstract=943608 or http://dx.doi.org/10.2139/ssrn.943608

Hongbin Cai (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Hong Feng

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States