Intra-Organizational Knowledge Creation and Sharing in a Principal-Agent Setting

Abstract

In the knowledge-based view of the firm, organizational knowledge and expertise are recognized as primary drivers of continuous innovation and competitive advantage. However, as an intangible resource knowledge resides within individuals who personally value their skills and therefore have an implicit incentive to keep knowledge private. Consequently, it is necessary for organizations to provide adequate rewards to control the diffusion and utilization of knowledge among their employees. The purpose of this paper is to develop and analyze a reward structure that motivates agents to generate additional knowledge and subsequently share it with co-workers. In this context, creation and sharing are considered costly actions that, in turn, decrease the cost of providing an output-oriented effort. The optimal incentive structure is derived to balance the explicit incentives of monetary rewards and the implicit benefits associated with a higher level of private knowledge. The model suggests that organizations need to choose whether they want to emphasize either the creation or dissemination of knowledge. The optimal effort level for sharing knowledge depends not only on an agent’s personal incentive, but more importantly on the marginal productivity and the incentive of other agents to efficiently apply the shared knowledge. However, stronger incentives to generate knowledge have a detrimental effect on each agent’s willingness to share and vice versa. The findings in this paper should help to further understand organizational learning and the transfer of developed knowledge. Furthermore, it provides insights into the trade-off between the creation and sharing of knowledge, which should aid managers to better design incentive contracts for employees to focus their attention on the desired task.