Value Co-Creation and Distribution: A Contingency View on the Effects of Financial Slack

Abstract

This study develops a theoretical perspective on inclusive processes of value co-creation and distribution contingent on the financial slack in the organizational system. By focusing on the economic and institutional costs of slack, as well as on its benefits to support economic exchanges with social dimensions, we propose an inverted U-shaped relationship between slack and the co-created value. We preview our argument by analyzing how slack sustained a collective decision-making process to plan a new national railway, albeit the dubitable social gains of the solutions achieved by consensus. We then draw on organization governance literature using new institutional economics to theorize empirical observables, and probe the slack-value relationship with a game theoretic model that holds constant the essence of the governance arrangement. We show the value-slack relationship is moderated by the accrual of benefits from a negotiated settlement: if the benefits are low, the co-created value is maximized by increasing slack up to the point that maximizes the capital provider’s share of value. If the benefits are high, the co-created value is maximized by increasing slack even more so as to maximize the enfranchised stakeholders’ share of value. We also show that, up to a point, increased slack widens the space of mutually acceptable solutions. Also, the effect of slack is steeper if the costs of slack can be reduced by making credible commitments today to mobilize more resources tomorrow.