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A Naturalistic Approach to the Theory of the Firm: The Role of Cooperation and

Cultural Evolution

Christian Cordes

Evolutionary Economics Group

 November 2006

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Introduction• In many organizations, employees cooperatively

contribute to their organization’s goals• Why do employees identify with organizational

goals?• Do organizations depend entirely on motivating

agents through their selfish interest?• Our hypothesis: Firms are organizations within

which a cooperative regime based on evolved social predispositions can be established.

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A Naturalistic Approach to the Firm

Processes of cultural transmission:

- Evolution of corporate cultures

- Learning biases

Some behavioral dispositions:- Insights from cognitive

science,psychology, anthropology, etc.

- Social dispositions

The role of the entrepreneur:- Theory of cognitive

leadership- Socialization processes

The method:- Recursion equations

- Depicts the frequency of a cultural variant in a population

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The Dual Inheritance Theory

• In human organizations, cooperation can emerge spontaneously

• The dual inheritance theory explains why humans are capable of large-scale cooperation

• A disposition for cooperation has evolved by a process of cultural group selection

• Culture can maintain intergroup variation that responses to groups selection: the conformity bias

• Groups with prosocial norms have an advantage over competing groups in this process

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• Cultural group selection set in motion a process of gene-culture coevolution

• Prevailing social transmitted institutions in a group exert selection on innate human social dispositions → evolution of a social psychology that facilitates cooperation

• This process also explains the evolution of moralistic strategies → altruistic punishment

• Biases in cultural transmission:– Inclination toward group-beneficial cultural contents

– Inclination toward selfish or opportunistic behavior

– A model-based bias

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The Theory of Cognitive Leadership• The entrepreneur plays an important role in the

evolution of corporate culture• Cognitive constraints: cues are employed to

discriminate among information and are organized into cognitive frames (biases belong to these cues)

• A business conception provides a shared cognitive frame that coordinates employees’ activities and can build upon humans’ social predispositions

• A business conception can motivate people to contribute to a common goal instead of private interests

• Cognitive frames are implemented via social learning → group size effects and socialization

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The General Model

• The general model is of the form: cultural evolutionary forces

(biases).• We observe two cultural variants, c “cooperative

behavior”, and o “opportunistic behavior”.• p denotes the frequency of c in the group• Biases as cultural evolutionary forces:

– A model-based bias– Two direct biases

tt pp 1

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Cultural Transmission and Socialization

(1)

PE

EE n

A

(2)

PE

PP n

A

- The entrepreneur’s influence is represented by:

- The weight of a member of the peer group is given by:

- The relation represents the entrepreneur’s

charismatic potential

P

E

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Peers

Table 1 The probability of agents acquiring trait

c

or o given a particular set of models that have different total weights ( EA , PA ).

n

c

oc

cc... PE nAA

c

occ ,... PE AnA 1 PAc

oocc ,,... PE AnA 2 PA2c

oo... EA PnA

…………

0

Entrepreneur/Leader

Cultural Variant of

Probability That an Agent of the New Cohort Acquires Cultural Variant

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- The partial recursion for the socialization phase:

(3)

- The partial recursion for the individual learning phase:

(4)

PE pnAAp

occo pppp 1

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- The complete recursion:

(5)

(5a)

- The equilibrium frequency of c:

(6)

ocPEcoPEPE pnAApnAApnAAp 1

coPEPE pnAApnAAp

E

Pco

co

n

p

1

1ˆ

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- The derivative of with respect to n is negative for all n

→ given a certain charismatic potential of the entrepreneur, the level of cooperation within a firm is decreasing with firm size

- The derivative of with respect to is positive → the larger an entrepreneur’s charismatic potential, the higher the level of cooperation in the group for fixed n

E

p̂

p̂

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The Firm’s Growth Process

- A recursion for the firm’s growth process:

(7) oc rpnrpnn 111

Profit due tocooperation

Loss due toopportunism

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The dynamic system

• Two coupled recursions describe the development of p and n in time:

(8)

(9)

ppnAApnAAp coPEPE

nrpnrpnn oc 111

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- The equilibria in the case of symmetrical profits and losses:

(10) (11)

E

Pco

co

np

1

1ˆ

E

Pco

con

21ˆ

- Substituting (11) into (10) gives us:2

1ˆ p

- The equilibrium at and is stable. 2

1ˆ p

E

Pco

con

21ˆ

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- The equilibrium’s properties:• If p<0.5, the number of group members will decrease

until p reaches 0.5 and n stabilizes

• As long as p>0.5, the firm grows, until the decreasing influence of the entrepreneur causes p to fall to 0.5

• A high value of shortens the firm’s growth process when p>0.5 and accelerates its decline when p<0.5 and vice versa

co

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- Dropping the symmetry between and yields:

(12) and (13)

cr or

oc

o

rr

rp

ˆ

Pcoo

Eoccoc

r

rrrn

ˆ

- If is large relative to , the firms’ numbers of employees are large and the frequency of cooperative agents is low.

cr or

- If is relative large, the firms’ sizes are small and the level of cooperation is high.

or

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Some Implications for the Theory of the Firm

• Given a certain charismatic potential of the entrepreneur, the level of cooperation is decreasing with firm size.

• Depending on this potential, firms have different growth potentials – a cognitive constraint to firm development.

• At this point organizational innovations are required → monitoring regime or subdivided entrepreneurship

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Proposition 1: An entrepreneur’s capability to convey a business conception to a firm’s employees is subject to cognitive constraints. As a result, in the course of a firm’s growth process, the level of cooperation is decreasing. Contingent on the entrepreneur’s charismatic potential, firms have different growth potentials in this stage of their existence.

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Proposition 2: If an entrepreneur’s charismatic potential is insufficient to sustain firm growth, the firm’s stagnating final size mainly depends on the relative strength of the learning bias favoring the opportunistic cultural variant.

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Proposition 3: If the costs of opportunistic behavior are high, firm size stays small, thereby facilitating a higher level of cooperation within the group. If these costs are low, relatively few cooperative employees can support a large firm.

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• If the costs of opportunistic behavior are high, then firm size stays small – collectively shaped cognitive frames enable a high degree of cooperation in small groups

• In this case, cognitive leadership can keep in check potentially costly opportunism

• A side remark: these findings differ from those in transaction cost based analyses of firm sizes.

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Proposition 4: In her prominent role as a social model, an entrepreneur’s general behavior influences the evaluation and subsequent dissemination of cultural variants with the firm.

• A business conception that explicitly emphasizes the selfish purpose of the firm, for example, one that is solely focusing on profits, may also foster the concept of selfishness within the firm or group.• The firm’s engagement in social or environmental responsibility can assign a higher general value to cooperative and altruistic behaviors and the underlying cultural variants, thereby promoting their transmission.

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Conclusions• Why do firms exist?

– Firms enhance the opportunity for entrepreneurs to inculcate their cognitive frame in employees compared to dealing with market buyers and sellers at arms length.

– As regards the question of the relative efficiency of markets and organizations, an important element of the advantages of organizations such as firms is that they offer a more powerful setting to implement a regime of cooperation than market transactions could do.