Organizational inertia and dynamic incentives

We model the level of inertia as an endogenous rational choice made by the organization (principal). We show that the efficient organizational response to the presence of private information on the value of change will in general be to bias the decision rule towards the status quo, the compensation of the agent differs significantly according to whether the information is private to the principal or the agent, and the efficient distribution of ‘real’ authority in an organization need not always be profitably retained by the principal.