THE ROLE OF INCENTIVES AND COMMUNICATION IN STRATEGIC ALLIANCES: AN EXPERIMENTAL INVESTIGATION

1. THE ROLE OF INCENTIVES AND COMMUNICATION IN STRATEGIC ALLIANCES: AN EXPERIMENTAL INVESTIGATION RAJSHREE AGARWAL RACHEL CROSON JOSEPH T. MAHONEY Strategic Management Journal,2010

2. ABOUT THE AUTHORS RAJSHREE AGARWAL Professor of Entrepreneurship and Strategy at U of Maryland Ph. D. in Economics, 1995, SUNY-Buffalo RACHEL CROSON Professor of Economics and Organizations, Strategy, and International Management at U of Texas at Dallas PhD, Economics, 1994, Harvard University Joseph T. Mahoney Professor of Strategy and Entrepreneurship at UIUC Ph.D in Business Economics, 1989, Wharton School (Penn)

3. Assurance/Coordination Game • A. Invisible hand game • B. Prisoner’s dilemma game • C. Assurance game • D. Assurance game w/ heterogeneous payoffs : Payoff dominant strategy : Risk dominant strategy

4. PAPER OVERVIEW MOTIVATION Alignment of economic incentives is a necessary, but not a sufficient, condition for achieving successful alliance outcomes. RESEARCH QUESTION How important are incentive alignment and communication to achieve success in cooperative alliance? What conditions may impact their efficacy in achieving success? Are there synergies between the two underlying mechanisms, or do there mechanisms substitute for each other? STUDY A cross-sectional laboratory experiment with 405 participants

5. STRATEGIC ALLIANCES WHAT IS SA? An interorganizational form where multiple exchange partners agree to invest resources, share knowledge, and engage in economic value-creating activities that build on synergies between the resources and capabilities that each of the exchange partner firms bring to the alliance. PROBLEM OF SA From the property rights theory with game theoretical insights , strategic alliances result in opportunistic behavior and free-riding.

6. ECONOMIC INCENTIVES PROPERTY RIGHT THEORY “Getting the economic incentives right” (Kim & Mahoney, 2005; 233) HYPOTHESES Hypothesis 1: Alliances wherein decision makers have a higher ratio of common to private benefits are more likely to achieve success than alliances wherein decision makers have a lower ratio of common to private benefits. Hypothesis 2: Alliances in which there is heterogeneity in strategic alliance partners’ ratio of common to private benefits will have a lower likelihood of success than alliances where exchange partners are relatively homogeneous in their ratio of common to private benefits.

7. COMMUNICATION CLASSICAL ORGANIZATIOAL THEORY OR SOCIAL PSYCHOLOGY LENSES Emphasis on the nonmaterial, informal, interpersonal, and moral basis of behavior. Strategic alliances may also benefit from incorporation of motivation/design solutions, especially “communication”. Communication can reduce coordination cost and address management issues. Also, it can engender cooperation through moral suasion, development of group identity, and trust. HYPOTHESIS Hypothesis 3: The effect of incentive alignment on the probability of success in alliances is higher in the presence of communication than in its absence.

8. EXPERIMENT DESIGN The authors developed five treatments : low common benefit, high common benefit, high common benefit with communication, mixed common benefit, and mixed common benefit with communication PROCEDURE 405 participants from one MBA program made decisions in strategic alliances. IMPLEMENTATION Differences in the ratio of common to private benefit treatments were implemented by differences in bonus structure across the alliance simulations.

9. EXPERIMENT INDEPENDENT VARIABLES The indicator variables for each of the five treatments (e.g., high common benefit = one if the observation was drawn from that treatment, and zero otherwise) The period in which the decision made. CONTROL VARIABLES Group fixed effects; the data is hierarchical (alliance members are grouped together). ANALYSIS Logistic regression analysis for the first dependent variable, and multivariate regression analysis for the other dependent variables.

10. RESULTS H1 supported H2 supported H3 supported

11. Results • Common benefits (no communication) > > • With communication > >

12. Results Approximately double

13. DISCUSSION AND CONCLUSIONS CONCLUSIONS Consistent with property rights, alignment economic incentives is necessary for success, but is not sufficient; the ability to communicate increase the probability of success. LIMITATIONS Experimental methods; exogenous uncertainty, endogenous uncertainty, students sample CONTRIBUTIONS Integrate key insights (economic game theoretical lens and social psychology lens), provide powerful experimental methods, emphasize a cooperative system, contribute to strategic alliance theory.