Culture, effort variability, and hierarchy

This article investigates how culture affects economic outcomes in a behavioral model of the firm hierarchy which consists of a principal and an agent. In a society with two cultural orientations, the agent has to adopt the principal's culture to work. Coordination requires an additional cost if the agent has to change cultures. Effort is not subject to contract. Given effort variability, different coordination costs can generate different effort levels among firms. There are effort complementarities between the parties, which enforce a multiplicity of possible equilibrium outcomes. Even though culture may cause the inefficient outcomes, market forces cannot reduce the freedom to preserve cultural identity.