Organizations and Markets

The Organizational Implications of Creativity

10 November 2007 at 12:00 am Peter G. Klein 2 comments

| Peter Klein |

This paper, forthcoming in Organization Studies, asks how entrepreneurs can structure firms to encourage employee creativity and discovery while discouraging unproductive rent-seeking. The former requires delegation and the latter requires close monitoring and control; managing these trade-offs is a key to successful entrepreneurial performance.

In “The Organizational Implications of Creativity,” Richard Gil and Pablo Spiller examine a similar trade-off: the choice between internal and external procurement of creative activities. The nature of these activities makes them difficult to manage internally, but buying creative content on the market subjects the buyer to the winner’s curse. Here’s the abstract:

We develop a basic framework to understand the organization of highly creative activities. Management faces a fundamental tradeoff in organizing such activities. On the one hand, since creativity cannot be achieved by command and control or by monetary incentives, internal/contractual production of creative products is plagued by hazards arising from their fundamental characteristics: extremely high input, output and market uncertainty, and the inherent informational advantages of creative talent. Procuring highly creative products in the market place, though, exposes the distributor to a fundamental risk: independently produced creative goods are generic distribution-wise. Thus, in procuring creative products in the marketplace, distributors face the unavoidable winner’s curse risk. Since this risk is, to a large extent, independent of the creative nature of the product, the higher the creative content, the higher the relative hazards associated with internal or contractual production. Thus, internal/contractual production of creative goods will tend to be less prevalent the higher the creative content associated with its production. We apply this insight to the evolution of the U.S. film industry in the mid-XXth century. We exploit two simultaneous natural experiments — the diffusion of TV and the Paramount antitrust decision forcing the separation of exhibitors from distributors and prohibiting the use of block-booking. Both events increased the demand for creative content in movies. We develop empirical implications which we test by analyzing in detail the decision by distributors to produce films internally or to procure then in the market place, in the face of an increase in the demand for creative content.

Entry filed under: - Klein -, Management Theory, Theory of the Firm.