In my dissertation, I draw on organizational economics, value-based models of strategy and organizational and individual learning theories to explore how the dynamics of responses to organizational incentives affect value creation and value capture within firms. The dissertation consists of five chapters. The data set, used in chapters presenting empirical results of the dissertation (chapter 2, 3, and 4), is described in detail in chapter 2.

Chapter 1 of this dissertation provides the intellectual foundations upon which my dissertation work builds and frames the academic areas to which my work contributes. In this chapter I review both theoretical and empirical literature on the provision of incentives within firm. I also review the literature stream on value based approach to business strategy.

Chapter 2 explores why and how the division of value within firms—between a firm and its employees—evolves under a given incentive regime. I argue that organizational incentives trigger two distinct learning processes: productive learning and adverse learning. As the evolution of these two learning mechanisms follows different clocks, organization's share of the value created follows an inverted-U shaped, evolutionary trajectory under a given incentive regime. In other words, the ability of an incentive regime to induce the intended results evolves, giving rise to incentive life-cycles. Regression results, based on outlet-level data from all outlets of a commercial bank covering full lifetime of an incentive regime, and supplementary analyses are strongly congruent with the predictions. The study presented in this chapter, a first to explore empirically the evolution of the division of value within firms, suggests that internal learning process can influence the effectiveness of organizational incentives and lead to the evolution of the division of value between economic actors.

Chapter 3 explores heterogeneity in responses to organizational incentives. Strong financial incentives are a common strategy for enhancing organizational performance. Existing theory predicts that strong incentives are more valuable to the organization when workers have high levels of human capital. However, high-ability workers may also be more adept at manipulating incentive systems to their own ends, in ways that damage overall organizational performance. The study presented in this chapter shows that branch managers with superior ability are more productive in their primary tasks. However, they are also more likely to manipulate tasks in order to increase incentive payouts. Recovering local demand for products, I find a negative net effect of ability: a 2 percentage point reduction in managers' contribution to organizational profits. Profit losses increase over time, indicating "adverse learning". The results suggest that ability and learning can create agency costs that potentially outweigh any productive benefits for organizations.

In chapter 4, I argue that economic theories of organizations describe organizational decisions as rational responses to prevailing incentive structures. In contrast, behavioral theories suggest that organizational decisions reflect bounded rationality and cognitive biases. This chapter explores and distinguishes empirically these two competing views and estimates their performance consequences. The study uses daily performance of 164 units of a retail bank throughout a two-month sales tournament. Former tournament leaders—units who have occupied a prize-eligible rank but have fallen out—have 28 percent higher daily sales than units who have never led. This is not due to underlying productivity differences; neither is it fully attributable to the prevailing incentive structure. Rather, outlets appear to be motivated to regain a lost "endowment": the contest ranking entitling them to a prize. The results therefore suggest that—in addition to the effects predicted by standard economic theories—a behavioral mechanism partially determines the units' performance.

Chapter 5 concludes this dissertation and offers some avenues for future research. In particular it investigates how the framework developed to study complements transaction cost economics and how it can be extended to study the dynamics of value creation and value capture across firms and industries.