Implicit Control Mechanisms and Organizational Learning¸

ABSTRACT: We link two elements of organizational design, the delegation of decision-rights and the provision of incentives, to the behavior and human capital formation (e.g. learning) of lower-level employees. We exploit a field-research setting in which employees ’ use of decision rights can be directly measured and traced to performance outcomes. We document implicit incentives in the form of sharp increases in employee termination linked to “excessive ” use of decision-rights. We find that these implicit incentives are strongest for employees in business units which monitor the use of decision-rights most closely (e.g. “tight monitoring”). We document two broad behavioral effects for employees that are consistent with implicit incentives in tighter monitoring environments: (1) they are less likely to use discretion in exercising decision-rights; (2) they are less likely to adjust for local information, including historical performance data, in their decision-making. Finally, we document strong learning effects among lower level employees in our setting. However, these learning effects are concentrated among employees in “loosely monitored ” business units and almost entirely absent in “tightly monitored” business units. The results are consistent with an experimentation hypothesis in which tight monitoring of decision-rights leads to fewer deviations from prescribed decision rules and less learning