Organizing for Cooperation: Fostering Relational Contracts to Support Interunit Knowledge Sharing

Abstract

I study how a multiunit firm can promote knowledge sharing, creating conditions to foster the development of a relational contract that would support a mutual exchange of know-how between its units. Powered profit incentives are shown to be effective as they increase the future value of access to peer units' know-how and strengthens the incentives to cooperate with peers today. Linking the units' compensation to the performance of their peers improves the conditions for cooperation and further lower the cost of incentives. Relative performance evaluation is generally superior to joint performance evaluation as it increase the cost to a non-cooperative unit of being excluded from knowledge sharing between the other units in the future.