An Economic Approach to Influence Activities in Organizations

Abstract

Members of organizations spend considerable time, effort, and ingenuity attempting to influence decision makers. Such influence activities may bring benefits to the organization, but they also involve real costs. This essay offers an economic rationale for such influence activity as representing rational, self-interested behavior in the presence of informational asymmetries and an analysis of how the design of the organization's structure and policies should respond to the incentives for attempting influence. It is posited that information valuable for the organization's decision making is directly available only to members of the organization who have some personal stake in the decisions. These individuals may then have an incentive to try to manipulate the information they develop and provide in order to influence the resulting decisions to their benefits. This can be costly both in degrading the quality of decision making and in diverting the attention and effort of the organization's members from more productive activities. The organization has three different methods it can employ to discourage excessive influence activities and to encourage more directly productive uses of time and effort. It can limit access to decision makers and participation in decision making; it can alter its decision-making criteria to favor those performing well in productive activities; and it can provide direct financial incentives to encourage the desired allocation of effort. It is shown that an efficiently designed organization will use such financial incentives only as a last resort. Instead, it will always first alter its decision-participation policies and decisionmaking criteria.