Managerial Entrenchment with Strategic Information Technology: A Dynamic Perspective

Some economic and informational problems associated with organizational information technology (IT) spending may be attributed to managerial rent-seeking. Because of the unavoidable incompleteness of labor contracts, managers with misaligned incentives and budgetary discretion could entrench themselves through their non-value-maximizing adoption decisions. In order to boost their bargaining power in future contract renegotiation, they invest excessively in technologies they manage more effectively than their potential rivals. In addition, they tend to adopt technologies that can create large information asymmetries giving them significant knowledge advantage over their potential rivals ex post. We study the implications and effects of their rent-seeking behavior within the context of organizational IT adoption and management. The efficacies and the limitations of formal incentive contracting are discussed to underscore the need for additional governance mechanisms. While knowledge management may mitigate some of the agency problems associated with entrenchment, managerial self-policing issue remains a challenge. We further explore the incentive provision potential of relational labor contracts in combating entrenchment.

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