An Integration of the

Contribution-Inducement

Model and Economic Theory

0 1986 Scandinavian

Joumal of Mmupment Studies

May 1986

Ernst Jomson

According to the Contribution-Inducement model, the organization is

viewed as a coalition between a number of participants. This model is

made more prccisc with the aid of economic theory in order to enhance

the degree to which it can be tested. With the help of C-I model, defined

here, problems and actions within a market economy can be analysed in

a more operational way than previously. The model can also provide a

new insight into the power relations and conflicts between the various par-

ticipants. According to this model the management, by virtue of its cen-

tral, well-informed and professional standing, will be in a position to con-

centrate on increasing its own freedom of action at the expense of con-

sumers in particular but also of labour. In that case, the owners of the or-

ganization will, with the aid of the management, obtain a strikingly large

part of the surplus generated by the organization.

The Contribution-Indummnt Model

The organization is viewed as a coalition comprising various

participants. The word participants here refers to those indi-

viduals or groups who are dependent on the organization in

various ways for the realization of their aims, and on whom

the organization is, at the same time dependent for its sur-

vival. The organization receives, from each participant, a

contribution in the form of inputs of various kinds, while in

return for their participation in the organization the partic-

ipants receive inducements either in the form of money or

otherwise, for example, social status. In so doing, each partic-

ipant requires from the organization, as a condition for par-

ticipating in the coalition, an inducement corresponding at

least to his contribution. The contributions made by participants are, at the same

time, the source of the inducements the organization can

offer. Consequently, if it is to survive, the organization must

be able to generate inducements that are at least as large as

the contributions. For this reason, the management - as

representatives of the organization - will seek to ensure that

the “sum” of the inducements is sufficient for all the partici-

pants in the coalition, and, moreover, that the conflicting

demands of the participants are balanced against each other

so that there is equilibrium between contributions and in-

ducements. Only if these demands can be brought into har-

mony with each other will the survival of the organization be

251

ERNST JONSSON

assured. (Simon, 1958; March & Simon, 1958; Cyert &

March, 1963).

Testing the contribution-inducement model requires pro-

cedures for measuring the inducements offered by the organ-

ization and the contributions made by the participants

(March & Simon, 1958).

‘Along with the contribution-inducement model, Al&an and

Demsetz (1972) h ave introduced a contractual approach to the

company, whereby they emphasize the role of the owners of cap-

ital as co-ordinators of the company’s activities. According to

this theory of economic organization, the management comes

to a mutual agreement (contract) with the company’s diffe-

rent parties (e.g. employees, suppliers). Jensen and Meckling

(1979) also describe the firm (company) as a system of con-

tracts. According to them the firm is a legal fiction that serves

as a focus for a complex market process in which the con-

flicting objectives of individuals are brought into equilibrium

within a framework of contractual relations.

In the two previously-mentioned economic theory ap-

proaches there is no link with the theory of organization. The

objective of the following article is to integrate the theory of

organization and economic theory.

Concepti and Assumptions Undt?@ing the Defined

C-I Model

To enable a person to be described as a participant in an or- The Participants

ganization he must be:

0 connected to a certain identifiable organization in a con-

tractual relationship; the participant must also be able,

within the limits imposed by law or contractual regula-

tions, to join or leave the organization freely;

0 a participant whose involvement takes the form of a con-

tribution-inducement relationship with a direct link be-

tween his contribution and the inducement offered by the

organization.

Using this definition as a starting point, the following may be

regarded as participants: the employee, the capital owner, the

customer, the supplier, the creditor and the management of

the organization.

In its capacity as an artificial person under private law, a

public authority may also be a participant, for example, as a

customer, supplier or creditor. However, the State or a local

authority, as a legaslative body, as a political unit represent-

ing citizens’ interests, as a provider of services free of charge

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or merely as a recipient of taxation revenue, is not to be

regarded as a participant. In spite of this it may exert influ-

ence on the activities of the organization, for example indi-

rectly through statutory regulations laying down the condi-

tions under which organizations may operate.

The management of the organization, which is assumed to

be in its employ, is in charge of:

0 formulating the objectives the organization;

0 representing the organization in its contacts with other

participants;

l directing the operations of the organization in other

respects.

As the representatives of the organization, management has

a dual role. In relation to the buyers of the company’s prod-

ucts, management functions as a seller, whereas in relation to

other participants (suppliers, granters of credit, employees) it

functions as a buyer.

In return for their participation in the organization all

participants, except for the owners of the organization, are

assumed to receive an inducement, the size of which - or at

least the basis of which - is determined in advance. The

reward accruing to the owners of the organization is assumed

instead to be residually determined. The portion of the total

sum of inducements remaining when other participants have

received their inducements will, therefore, accrue to the

group of participants who own the organization. The owners

will thus possess the right to command this remaining sum,

and it is further assumed that they are also entitled to appoint

and dismiss the management (cf. Alchian & Demsetz, 1972).

% Buyer’s High& and the Selers’s In economic theory a buyer’s willingness to pay is defined as

Lowest OJer the highest price he is prepared to pay for a product or factor

of production. Similarly, a seller’s rzzwvation or trawfm p;Ce for

a product or factor of production is defined as the lowest price

at which he is willing to sell (see, for example, Scitovsky,

1963).

The reservation price of a well-informed and rational seller

reflects the opportunity cost the product or service has. It is

assumed that a buyer’s willingness to pay for a certain prod- uct or service is settled in a similar way.

The more alternatives facing a buyer, the lower the price of

the best alternative, or the willingness to pay, is assumed to

be. Correspondingly, it is assumed that the more selling alter-

natives there are, the more the price of the best selling alter-

native, or the reservation price, will rise.

Minimum Requiremkntfor Inducemtrnt If a participant is to take part in a certain organization,

and Surplus he will lay down a minimum requirement where inducement

is concerned:

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ERNST JONSSON

0 the price offered to the seller must not be less than his

reservation price (the opportunity cost of his contribution);

0 the price confronting the buyer must not exceed his will-

ingness to pay (the opportunity cost of his inducement).

For this reason a surplus (economic rent) arises as soon as the

participant receives an inducement in excess of his minimum

requirement. In such a case, the inducement is in fact larger

than is necessary for the participant to take part in the organ-

ization (cf. economic rent as an unnecessary payment, Boul-

ding, 1955). As long as the organization is expected to yield

a surplus, it will, by definition, be profitable for the partic-

ipant to turn to it in the future also.

On condition that a buyer’s highest offer (willingness to

pay) is greater than the seller’s lowest offer (reservation price),

the difference between them denotes the scope for bargain-

ing. The difference between the highest and the lowest offer

will, at the same time, indicate the overall surplus available in

the negotiating situation. The difference between the buyer’s

overall willingness to pay and the reservation prices (the

overall opportunity cost of resources employed) of other par-

ticipants (sellers) will, accordingly, denote the total surplus

the organization generates through its activities. In other

words, the minimum requirements of all potential partici-

pants impose a limit on the possible size of this surplus at dif-

ferent levels of production. At given minimum requirements

and level of production, the size of the overall surplus is there-

fore definitely determined. Also, if the number of partici-

pants is given, this surplus cannot be increased unless the

minimum requirement of one of the participants is reduced.

The negotiations between the buyer and the seller may be Negotiating Requiremmt said to be concerned with how the overall surplus is to be shared between them. The seller is assumed to aim for the

highest possible price while the buyer aims for the lowest. The

price will thereafter be futed according to the existing equi-

librium between supply and demand in the market. As long

as this equilibrium is fured through negotiations, the assump-

tion is that each of the parties also makes negotiating offs which:

0 for a buyer, will be less than his highest possible offer, i.e.

willingness to pay; 0 for a seller will exceed his lowest possible offer, i.e. reserva-

tion price.

The negotiating requirement is an expression of the partici-

pant’s aspiration level as far as the size of the inducement is

concerned. It is assumed that the participant, when putting

forward his negotiating requirement, seeks to obtain as large an inducement and surplus as possible in return for his given

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contribution. At the same time he learns from his experience.

According to March and Simon (1958) the aspiration level

over time tends therefore to adjust to the level of achieve-

ment. For example, if the achieved performance is below the

aspiration level, the target will be revised downward in the

next decision period. However, as an expression of the partic-

ipant’s expectations, the level of aspiration will always be

higher than the minimum requirement.

The minimum requirement may be described as a real

requirement. The fact is that whether the participant takes

part in the organization or not depends entirely on this

requirement being met. If the organization is to survive, the

minimum requirements of the participants must not mutu-

ally conflict, so if the minimum requirement of a certain

participant is to met it must not be necessary to offer other

participants inducements exceeded by their minimum re-

quirements.

Instead, the difference between the negotiating require-

ment and the minimum requirement can be regarded as a

requirement which is, in the first place, concerned with the

sharing of the overall surplus among the various participants.

If what may be called the distribution requirement of a cer-

tain participant is met, this takes place at the expense of other

participants.

It is assumed that the type of inducement requirement laid

down by the participant will depend on the nature of his

connection with the organization. Requirements from cus-

tomers, suppliers, creditors and passive owners of capital,

whose connection with the organization stems mainly from

the market, in the first place concern the conditions of the

exchange transaction. Over and above this, the requirements

presented by employees, by active owners of capital and by

the management of the organization are concerned with how

the activities of the organization are to be conducted.

Before minimum and negotiating requirements can be

fixed, the participant must also decide which factors there are

to cover. For example, a consumer’s requirement may be

concerned with the quality of a product as well as with its

price. Correspondingly, an employee’s requirements could

cover wages as well as working conditions with reference, for

example, to safety in the working environment or the degree

of security of employment.

Full interchangeability is assumed to exist between such

alternatives, both monetary and non-monetary For example,

a high-quality work requirement can be exchanged for one

relating to higher wages. Differences in the quality of work

are then priced indirectly on the labour market. Similar-y, it

is assumed that differences in, for example, product quality,

255

IntmhangeabiLi~ of Altmnatiue

Requinmmts

ERNST JONSSON

conditions of supply and level of service will be priced on the

product market.

It is assumed that management of the organization has Incomplete Information Concerning the

complete information concerning the negotiating require- Minimum Rquirrment of the O&r R+y

ment of each participant. On the other hand, it is also

assumed that the information available to the management

concerning the minimum requirement of the participant is

incomplete. In such a case, the management does not possess

complete information concerning the difference between the

negotiating requirement and minimum requirement, i.e. the

surplus requested. In other words, the management cannot

be certain whether a high negotiating requirement is an

expression of a high minimum requirement. In fact, it is

through the actual behaviour of the participant that the

management is subsequently informed as to whether the

minimum requirement:

l is less than or equal to the inducement offered (through

the participant’s decision to remain in the organization);

0 is larger than the inducement offered (through the partici-

pant’s decision to leave the organization).

Similarly, it is assumed that each participant does not possess

complete information concerning the management’s mini-

mum requirement, i.e. reservation price as seller or willing-

ness to pay as buyer. However, it is also assumed that the

participant possesses complete information concerning his

minimum requirement.

Aim of the Participant

The extent to which a participant has freedom of action is The Inkxrt ofth Purchaser or the &4!er defined as the number of different alternatives open to him. in Increasing His Relative Freedom So, to simplify matters, the scope of action is exclusively of Action

determined by the number of alternative courses open. But,

according to the definition, the alternatives must differ: if

many, but very similar alternatives are available, freedom of

action may not be considered great.

It is in the interest ofboth buyer and seller to try to increase

his relative freedom of action. If, for example, the buyer

increases his own freedom of action or reduces that of the

seller:

0 both the lowest offer (reservation price) and the highest

(willingness to pay) will be lowered;

l the final price will lie nearer to the lowest offer than to the

highest one. The buyer thus increases his share of the

overall surplus at the seller’s expense.

AN INTEGRATION

In other words, the division of this surplus is determined by

the mutual relationship between the freedom of action of the

buyer and that of the seller, i.e. the number of purchasing and

selling alternatives respectively.

If, instead, the seller’s freedom of action is relatively large,

the price will lie nearer to the highest than to the lowest offer,

which at the same time is higher than it would otherwise be.

i% Participant’s Inttxrt in Increasing With the aim of raising his inducement in the long run, the

His Freedom of Action and Minimum participant has an interest in increasing his freedom of

Requirement action. As the participant, over time, obtains more alterna-

tive courses of action, the organization in which he partici-

pates will in fact be faced with a more far-reaching minimum

requirement than it was previously. In fact, the larger the

number of alternative courses of action that are open to him,

the higher the alternative value of his contribution. The par-

ticipant will thus receive a larger inducement than he would

otherwise have done, since:

0 the participant’s present organization (A) adjusts the in-

ducement offered upwards to at least the same level as the

increased minimum requirement, or

l the participant will leave organization A (whose induce-

ment no longer meets the increased minimum require-

ment) and go to the organization (B) which previously

represented the best alternative. The inducement offered

in organization A, which after the transfer becomes the

best alternative, will now represent the minimum require-

ment facing organization B. As this minimum require-

ment is less than the inducement offered (the minimum

requirement with regard to organization A) the partici-

pant will receive a surplus after the transfer. The transfer

to organization B is then precipitated by the fact that the

increasing alternative value, that is, the inducement in the

best alternative organization, later overtakes the slower

rising inducement from organization A.

Interest in Increasing the Organization’s Hickson et. al (1971) Thompson (1967) and Perrow (1961)

Deperuhce on the Participant have pointed out that power within organizations is based on

the role incumbents’ ability to control dependencies which

the organization finds most problematic. According to Jacobs

(1974) there are two components of dependence. These are

the essentiality of the item received in exchange and that

item’s availability from other sources. The fewer potential

sources of supply there are for a certain input, and the more

essential that item is for the organization, the more prob-

lematic the dependency will be for the organization. The

greater the number of potential sources there are for the

output, and the less essential that output is to the buyers, the

more problematic this dependency will be for the organiza-

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ERNST JONSSON

tion. Organizations are thus controlled by those who com-

prise or control the organizations’ most problematic depen-

dencies (‘Jacobs, 1974). The more dependent the organiza-

tion is on the participant’s contribution, the greater his power

and inducement will be. And the greater the participant’s

freedom of action, i.e. the less accessible his contribution is to

the organization, the greater this dependence will be. In

order to increase his power and inducement, it is also in the

interest of the participant to make his contribution as essen-

tial to the organization as possible. By improving the special

competence the organization demands, an employee with a

given freedom of action can, for example, increase the alter-

native value of his contribution.

As long as the inducement is larger than the minimum m Partic$ant’s Intmst in the

requirement stipulated, the participant will have an interest Survival of the Organization

in the survival of the organization in question. Otherwise he

will lose his surplus. Thus, the larger the surplus is, the

stronger the participant’s interest in the survival of the organ-

ization will be. Where the inducement is given, the surplus

will vary inversely with the participant’s minimum require-

ment. At the same time this minimum requirement is pre-

sumed to be correlated with the number of alternative

courses of action open to the participant. Thus the partic-

ipant’s surplus, and his interest in the survival of the organ-

ization, is inversely related to the size of his freedom of action.

When a minimum requirement is given, each participant

can have further interest of seeing the organization grow.

Where an equilibrium price is fixed on the basis of the partic-

ipant’s contribution, the organization will, in fact, have to

increase the inducement in order to be able to attract more

marginal participants. The increased inducement will there-

fore lead to an increase in the surplus payable to intramar-

ginal members of the group participants in question.

It is also in the participant’s interests that his second best

organization survives. Otherwise his freedom of action and

his minimum requirement are reduced.

Objecttim of the Organization

Where the minimum requirement is given the participant Inrme E&d by the Participant on

seeks to maximize his surplus. When pursuing this aim, the the Objectives of th8 Organization participant is also interested in having his own objectives

taken up by the organization. At the same time, however, the

various participants compete for a maximum share of the

organization’s total surplus that is given in the short term.

Conflicts of interest are thus inevitable when the distribu-

tion requirements directed at the organization are met. The

258

AN INTEGRATION

objectives of the organization cannot therefore fully reflect

the objectives of all the participants.

The participant’s potential means of exerting influence on

the objectives of the organization will depend on his power

within the organization (cf. Cyert & March, 1963). The size

of this power will depend on:

0 the extent to which the participant is able to apply his

potential sanction to transfer to another organization; this

in turn is determined by his own freedom of action;

0 the freedom of action open to the management, which will

determine the extent to which the sanction threatens the

survival of the organization. The greater the threat posed

by the sanction, the greater the extent to which the organi-

zation will be dependent on the participant’s contribution.

The fewer the alternative courses of action competing with

the present one, the lower the probability that one of these

will be superior. The fewer alternative courses of action open

to the participant, the less likely it is that his potential sanc-

tion will be put into effect. Thus a participant whose freedom

of action diminishes (for example, a consumer who has a

highly-developed sense of brand loyalty, a supplier with a

contract covering several years or an employee whose benefits

are linked to his years of service) will be bound more firmly

to the organization, and the risk that he will exercise his exit-option is smaller (cf. Hirschman, 1970).

Moreover, the fewer alternative courses of action open to a

member of a certain group of participants, the higher the

probability of a participant leaving the organization being

replaced, since the existence of only a few alternative courses

of action open to a certain participant will indicate a low

demand for his contribution and vice versa. Consequently,

the number of alternative courses of action will be inversely

proportional to the number of potential replacements on the

market.

Thus, the smaller the participant’s freedom of action, the

fewer the number of opportunities available to him to in-

fluencc the aims of the organization by means of his exit

option. The same applies to the participant’s opportunities of

exercising influence via his voice option. The smaller the

potential threat to the organization’s survival posed by the

exit option, the less effective the voice option can be expected

to be (cf. Hirschman, 1970). ‘Thr! Special Position of the Owners of A participant whose requirement are not met can threaten

the Organization to leave the organization. However, such a sanction is applied

only when the participant runs the risk of losing his surplus.

On the other hand, the owners of the organization are in a

position to threaten the management with sanctions at an

259

ERNST JONSSON

even earlier stage. If the surplus accruing to the owners falls

below a certain, satisfactory level, they are, in fact, able to

threaten to dismiss the management.

By this means, the owners of the organization can increase

their freedom of action compared to that of other partici-

pants. The owners will then have much more influence on

the objectives of the organization than those of other partici-

pants. In order to reinforce this tendency, it will also be in the

interest of the owners to require that the management act in

a way corresponding to the wishes of the owners. For

example, the management may be given a certain share in

the ownership or a salary bonus, the size of which is related

to the surplus received by the owners themselves. Thus the

objectives of the organization will, to a great extent, be the

same as those of the owners.

A threat to the survival of the organization will arise only 2% Mamgemmt 5 Inter& in

when the inducement it offers is not large enough to attract Expanding Its Relative Freedom

replacements for those participants who leave. The potential of Action

threat to the survival of the organization will therefore be

smaller the fewer the alternative courses of action open to the

participant. Thus, as representatives of the organization,

management has an interest in expanding its freedom of

action in relation to other groups of participants excluding

the owners. A similar hypothesis is advanced by Pfeffer and

Salancik (1978). As the freedom of action diminishes for other participants,

there will also be an increase in the proportion of:

0 buyers who will remain with the organization given a

certain price increase;

0 sellers who will remain with the organization given a

certain price reduction.

It will then be possible for the management to reduce the

share of the surplus accruing to other participants, and so

benefit the owners. By reducing the freedom of action and

the minimum requirements of other participants, the total

surplus will at the same time increase. The surplus accruing

to the owners will then depend partly on the extent to which

the management is effective in limiting the freedom of action

of other participants.

Moreover, the fewer the alternative courses of action open

to other participants, the more reliable the information the

management of the organization can obtain about their

minimum requirements.

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Freedom of Action, Su7~lu.s and Marginal Equilibrium Lwel in th Organization - Dz.$wux Betzveen Gnq?x of Participants

Connection Between Equilibrium Price When an equilibrium price is futed, the price will be equal to

and the Rehztive Freedom of Action the reservation price of the marginal seller as well as the

Open to the Group of Participants willingness of the marginal buyer to pay. Consequently, there

will be equilibrium between inducement and the minimum

requirement specified, where the marginal member of a

group of participants is concerned. At the same time, since it

is at marginal equilibrium level, the price will identify those

among a potential group of participants who are interested in

joining the organization.

The marginal equilibrium level applying to a certain

group of participants is determined, among other things, by

the relative size (i.e. in relation to its opposite party) and

variation of its freedom of action. Where a group of partici-

pants includes, for example, sellers, the equilibrium price

level will in fact be higher:

0 the greater the average freedom of action of the sellers and

the smaller the average freedom of action of the buyers. In

this way the average height of both the supply curve and

the demand curve will be greater than would otherwise be

the case;

l the more variation there is around the average in the

freedom of action of the sellers and the less this freedom

varies among the buyers. The supply curve would then be

steeper and the demand curve flatter than they would

otherwise be. This will also lead to an increase in the

surplus accruing to the sellers.

The Oppotiunitks Available to the

Participant to Iwease His Rehtiue

Freeainn of Action

The level at which marginal equilibrium is established in the

organization will thus differ according to the way in which

both the extent and variation of the freedom of action of each

group of participants is related to that of its opposite party, i.e.

the management of the organization. So, an analysis of equi-

librium is inseparable from a study of the difference in the

freedom of action that may exist between participants in the

organization.

As representatives of the organization, the management stands in a relationship with each of the other participants.

Furthermore, in each relationship, the buyer and the seller

are opposed to each other. In connection with this, the

opportunities available for increasing one’s relative freedom

of action can vary as between the various groups of partic-

ipants as a result of differences in the conditions for, and

interest in, organized co-operation within a group of partic-

261

ERNST JONSSON

ipants. As a rule, relationships between parties appear to be

more lasting in the labour market than in the product mar-

ket. It may thus be assumed that the opportunities for organ-

ized co-operation are especially extensive in the labour

market. On the other hand, where a group of participants is

large and changes its composition rapidly over time, organ-

ized forms of co-operation are likely to be problematic. This

may be connected with a low degree of permanence (for

example, a purchaser of goods rarely bought) or a high

degree of mobility (for example, consumers who change from

one brand to another) among members of the group of

participants.

Moreover, a professional buyer or seller seems to be in a

better position to increase his relative freedom of action than

other buyers or sellers. The same applies to a group of partici-

pants who as a result of organized co-operation acquire pro-

fessional representatives as negotiators.

The participants can also possess varying degrees of infor-

mation concerning the opposite party. In consequence, the

possibilities of limiting the freedom of action of the opposite

party will vary between participants.

According to Emerson (1962) the relative power of one l& Special fiition ofManagement as

social actor over another is the result of the net dependence of Regards Extension of the Relative

one actor on the other. If A depends on B more than B Freedom of Action

depends on A, then B has power over A. A related per-

spective of power is represented by those who have argued

that the power of a social actor within the organization comes

from that actor’s ability to cope with uncertainty (Pfeffer,

1981). From both these perspectives the power of the com-

pany management increases if the freedom of action of the

other participants are reduced. The latter will then be more

dependent on the organization, and at the same time the

uncertainty felt by the management of the company concern-

ing the future survival of the organization will be reduced.

Each participant in the organization has one opposite

party, i.e. the management. As representatives of the organ-

ization, the management is therefore in a position to sys-

tematically increase its freedom of action at the expense of a

number of opposite parties. Such possibilities are also avai-

lable to the participants (creditors, suppliers, industrial

buyers) who are represented by a company led by a manage-

ment team. Other participants, such as consumers and

labour, who have only one opposite party, are not in this

position. The management’s superior access to information facili-

tates, at the same time, a concentrated extension of its relative

freedom of action. For example, the management seems to

have more information about the customers than the latter

262

AN INTEGRATION

have about the management as a representative of the organ-

ization.

Since producers control the information system, they can,

as Scherhorn (1973) h p as ointed out, reduce the consumers’

freedom of decision by exerting influence on motives and

preferences. For that reason the possibilities of reducing the

freedom of action available to his opposite party are greater

for the producer than for the consumer.

Furthermore, as a participant, the management of the

organization is professional and, in addition, a possible joint

action with other organizations is made easier by the fact that

the number of competitors is, as a rule, relatively small.

D$$WTZL~ in the Freedom of Action of The question of what constitutes a “just” division of the

W&s Partic$ants as a Result of total surplus can be answered only with the aid of some Imp~ecti0n.s on the Market underlying ethical evaluation. One conceivable evaluation is

that the various groups of participants ought to have the free-

dom of action that is prevalent in the perfect-competition

model. In this model the market lays down the conditions

applying in respect of a participant taking part in a certain

organization. In such circumstances, no individual partici-

pant is able to influence these conditions and the choice open

to the participant is, therefore, either to accept market condi-

tions or else to refrain from participating in the organization.

Under conditions of perfect competition therefore, both

buyer and seller have a similar freedom of action.

In reality, various kinds of market imperfection can lead to

variations in the freedom of action of each of the participants

in the organization. In an oligopolistic market, the freedom

of action of buyers may be smaller than it would otherwise be,

owing to product differentiation, lack of complete informa-

tion or the development of brand loyalty. Thus the demand

curve facing the organization as a seller will be less elastic

than usual. As long as the large number of buyers in an oligo-

polistic market act independently of each another, they will,

at the same time, not be in a position to bring about a corre-

sponding limitation of the management’s freedom of action,

i.e. the sellers. The deviations from the perfect-competition

model will then be greater on the seller’s side than on that of

the buyer. Compared with this model, the balance as regards

the freedom of action is tilted in favour of the sellers, and this

will be especially marked if there is tacit, organized co-opera-

tion between such sellers.

An organization usually acts as a buyer as well as a seller

in different markets (for example, as regards labour or input

goods), and the relative freedom of action open to the man-

agement of the organization will then be inversely related to

the competition the organization is subjected to in these

respects. Should the organization enjoy a monopoly or a

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ERNST JONSSON

dominant position on the product or factor market through-

out, its freedom of action will systematically increase at the

expense of other groups of participants on the purchasing or

selling side. In this way, the existence of market imperfections

can magnify the relative freedom of action of the participant

representing the owners of the organization.

Some Conclusions

As long as the participant receives a surplus, he will not leave Pro& Maximization as a Condition

the organization. Thus, in an organization that is owned by, for Survival

for example, the owners of capital a maximization of their

surplus cannot be regarded as a sinz qua non for the survival of

the organization. In view of the scope for applying sanctions

of the owners of capital, such an endeavour is more likely to

be a condition for the “survival” of the management of the

organization.

On the other hand, when the negotiating requirement of

a participant has been reduced to a certain level, it is conceiv-

able that the management mistakenly regards it is a minium

requirement since the management has incomplete informa-

tion concerning the gap between the participant’s negotiating

requirement and his minimum one. In such a case the man-

agement may perceive the negotiating requirement as a

threat to the survival of the organization, although, in fact, it

is no such thing.

According to the contribution-inducement model defined The Manapment of th Organization

here, there is a far-reaching community of interests between as a Biared Ekmcnt in the Settbment

the management of an organization and its owners. The of Con$%-

management will, therefore, try to settle conflicts concerning

distribution in a manner favouring the owners at the expense

of other participants. Thus, the special interests of the owners

of the organization will take precedence over those of other

participants. As regards those participants who are repre-

sented by a firm, this bias is neutralised by an equivalent link

with the management of that firm. For consumers and em-

ployees, there is no such counterweight to the one-sided link

between management and the owners. If the owners are not

to be favoured when the surplus is distributed, a good case

can be made out for making the management an impartial

settler of conflicts between consumers, employees and owners.

To this end, it is possible to allow these participants to act together to:

l appoint and remove the management of the organization;

0 determine the form of inducement payable to the man-

agement.

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AN INTEGRATION

Application of th Model

Only then will the management be able to achieve an impar-

tial balance between the conflicting wishes of consumers,

employees and owners. As far as the employees are con-

cerned, their voice in the firm’s affairs can also be justified by

reference to their position as risk-bearers (Jonsson, 1978). As

regards the consumers’ right of co-determination, this can be

channelled via a professional spokesman appointed by a

representative consumer organization, or by a State authority

for consumer affairs.

According to the model defined here, the relative freedom

of action of the participant will determine the size of the in-

ducement as well as the influence he can exert on the activities

of the organization. As an analytical tool, the model is also

applicable in a general sense, i.e. irrespective of who owns the

organization. The model can therefore be used in order to

analyse the distribution of power and the surplus in various

types of organizations. The following questions could, for

example, be analyzed in a more operational way than earlier:

0 Do the high profits made by a certain organization result

from the effectiveness of the management in restricting the

freedom of action of other participants, rather than indi-

cating that resources have been employed efficiently from

an economic point of view? To what extent are high profits

a consequence of, for example, a gradual reduction of the

consumers’ freedom of action by buying up and closing

down competing firms, rather than of low manufacturing

costs due to rational production methods?

l In sectors where an organization is the dominating pur-

chaser of labour in the local market, do employees receive

smaller wage increases than those received by comparable

employees in a sector where several organizations are

competing for labour?

l How does the freedom of action open to the various partic-

ipants vary as the state of business fluctuates?

l How does the distribution of a surplus in an organization

owned by consumers differ from its distribution in one

owned by the owners of capital?

Summary If an organization is to function, it will be dependent on the

co-operation of various participants, for example employees,

owners of capital, customers and suppliers. Before partici-

pating in a certain organization each participant will, accord-

ingly, require an inducement that is at least equivalent to the

alternative value of his contribution. Thereafter, however, the

various participants will have conflicting interests as regards

265

ERNST JONSSON

the distribution of the surplus made by the organization.

However, these unavoidable conflicts regarding distribution

do not constitute a real threat to the survival of the organiza-

tion. Its survival will, in fact, be endangered only when it is

unable to provide the minimum inducements demanded by

all the participants.

Potentially, the contribution-inducement relationship also

enables the participants to exert influence on the way in

which the organization operates. The greater the freedom of

action of the participant in relation to the management as the

representatives of the organization, the greater his potential

influence will be. After all, if the threat comes from the

participant that his contribution will no longer be available to

the organization, the threat will, in fact, be more effective:

0 with the increase of alternative organizations to which the

participant can offer his contribution;

0 with the decrease of replacements for the participant avai-

lable to the organization.

The balance prevailing within the organization at a certain

point in time will therefore reflect the division of power

among the various participants at that time. It follows that -

irrespective of identity (for example, owners of capital, em-

ployees or consumers) - the owners of the organization will

be in a special position by virtue of their having the right to

appoint and remove the management.

According to the contribution-inducement model defined

here, the interest of the owners of the organization will thus

be given considerable weight when the management formu-

lates the goals of the organization. At the same time, the

management - by virtue of its central, well-informed and

professional standing - will also be in a position to concen-

trate on increasing its own freedom of action at the expense

of consumers in particular, but also labour. In such a case, the

owners of the organization will, with the aid of the manage-

ment, obtain an especially large part of the surplus generated

by the organization.

If the management is to be able to function as an impartial settler of conflicts, there therefore seems to be a case for

giving the consumers - not just the employees - the right

to co-determination in the running of the firm.

With the help of the contribution-inducement model de-

fined here, problems and actions within the organization can

be analysed in a more operational way than earlier. This

model can also provide new insight into the power relations

and conflicts between the various participants. The link with

economic theory also creates novel ways of testing empirical

propositions derived from the contribution-inducement model.

266

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