# Corporate Culture and Economic Theory (Kreps 1990) ## 🎯 핵심 주장 Corporate culture is an **equilibrium** of a **repeated game** played by organizational members. Culture solves the problem of **unforeseen contingencies** by providing shared understanding of "what we do here when X happens." ## 💡 Null Breaking **They Said**: - **Economists**: Culture is "soft stuff," not analyzable - **Sociologists**: Culture is norms/values, not rational **Kreps Said**: Culture is **rational + strategic**. It's an equilibrium that: 1. Fills gaps left by incomplete contracts 2. Coordinates when situations are ambiguous 3. Is sustained by repeated-game logic (reputations) **Surprise**: Culture = Equilibrium = Relational contract (all the same logic!) ## 🔑 Keep / Retire ### Keep ✅ - **Culture as equilibrium**: Formalized C&M routines - **Unforeseen contingencies**: Culture's key function - **Reputation sustains culture**: Repeated-game logic - **Path dependence**: Early events shape which equilibrium - **Parallels to Schein**: Basic assumptions = equilibrium beliefs ### Retire/Update ❌ - **Too static**: How do cultures evolve? (Gibbons: need building mechanisms) - **Assumes clarity**: Shared understanding is HARD (Gibbons: clarity problem) - **Individual focus**: Underplays coalitional dynamics ## 🧱 논증 블록 ### Block 1: The Problem Contracts are incomplete. Unforeseen contingencies arise. Organizations need to respond coherently. ### Block 2: Culture as Solution **Culture** = "How we do things here" = **Equilibrium belief** about: - What actions others will take - How situations will be interpreted - What's considered appropriate ### Block 3: Sustained by Reputation Why do people follow culture? - **Short-term**: Might want to deviate - **Long-term**: Reputation loss exceeds short-term gain → Culture is **self-enforcing** (like relational contracts) ### Block 4: Path Dependence Early events (founders' actions, initial successes) → Create focal beliefs → Become equilibrium → Hard to change (switching costs) ## 🔗 Connections ### Builds On - **Cyert & March (1963)**: Organizational routines - Kreps formalizes: Routines as equilibria - **Schein (1985)**: Culture as "basic assumptions" - Kreps parallels: Assumptions = equilibrium beliefs - **Repeated games**: Folk theorem logic ### Built Upon By - **Van den Steen (2010)**: Culture as coordination device (different beliefs) - **Gibbons-Henderson-Spagnolo (2021)**: Categorization shapes culture - **Gibbons (2025)**: Building culture = building equilibria (clarity problem) ### Parallels **Kreps' 3 aspects of culture** ≈ **Schein's 3 levels**: | Kreps | Schein | |-------|--------| | Observable patterns | Artifacts | | Espoused values | Espoused beliefs | | Tacit assumptions | Basic assumptions | **Key insight**: All three are **constitutive** (shape interpretation), not just **regulative** (constrain behavior) ## 🎓 Teaching Notes ### The Unforeseen Contingency Example **Situation**: Customer angry about product defect **No culture**: - Sales: "Not my problem" (protect bonus) - Engineering: "Working as designed" (avoid blame) - Result: Customer lost **Strong culture** ("Customer first"): - Sales: Immediately offers replacement - Engineering: Investigates root cause - Result: Customer retained, problem fixed **How culture works**: Everyone knows "what we do here" without explicit contract ### Culture vs. Incentives **Wrong view**: Culture = values → people act from goodness **Kreps view**: Culture = equilibrium → people act strategically given **reputation concerns** Example: Don't cheat customers because: - **Not**: It's wrong (morality) - **Is**: Others will notice, my reputation suffers, I lose future gains ### Connection to Gibbons | Kreps (1990) | Gibbons (2025) | |--------------|----------------| | Culture = equilibrium | Equilibrium-building | | Unforeseen contingencies | Clarity problem (categorization) | | Path dependence | Building is slow, risky | | Reputation sustains | Credibility problem solved | | Assumes shared understanding | **Clarity problem unsolved** | ## 🔬 Research Implications ### Predictions 1. **Culture matters for unforeseen events**: Standard situations → formal contracts; novel situations → culture 2. **Path dependence**: Early events → lasting culture 3. **Culture change is hard**: Switching equilibria requires coordination 4. **Strong cultures → faster adaptation**: When everyone knows "what we do" ### Empirical Challenges - **How to measure culture?**: Surveys? Observation? Text analysis? - **Equilibrium selection**: Which culture emerges? (Gibbons: categorization problem) - **Culture change**: Triggering events? Leadership? (Gibbons: building mechanisms) ### Modern Extensions **Gibbons et al. (2021)**: - Culture shapes **categorization** of situations - Categorization determines **visible equilibria** - Small categorization differences → large culture differences ## 📊 Impact ### Academic - **8,500+ citations** - Legitimized culture study in economics - Connected to relational contracts literature - Foundation for behavioral strategy ### Practical - Culture matters for **adaptability**, not just cohesion - M&A: Cultural integration is equilibrium-switching - Startups: Early culture choices have lasting effects ## 📝 Personal Notes ### Why This Matters for Gibbons **Kreps (1990)**: Culture is equilibrium **Missing**: HOW do parties build this equilibrium? **Gibbons (2025) adds**: 1. **Naming** (Polanyi): Express tacit knowledge through stories, metaphors 2. **Framing** (GLW 2021): Categorization shapes which equilibria are visible 3. **Clarity problem**: Building shared understanding is HARD ### Kreps + Schein Synthesis **Schein**: Culture = pattern of basic assumptions (learned by group) **Kreps**: Culture = equilibrium (sustained by repeated game) **Synthesis**: Culture is **constitutive equilibrium**: - Shapes how people **interpret** situations (constitutive) - Sustained by **reputation** (repeated game) - **Path-dependent** on group's history (learned) ### The 3-Way Connection ``` Cyert & March (1963): Routines ↓ Kreps (1990): Routines = Equilibria ↓ Gibbons (2025): Equilibria = Relational Contracts = Culture = Shared Interpretations ``` **All face same challenge**: How to build shared understanding (clarity problem) ## 🎯 One-Sentence Summary Corporate culture is an equilibrium of repeated interactions that fills contractual gaps by providing shared interpretations of unforeseen contingencies, sustained by reputation and path-dependent on organizational history. --- *"Culture is what people think others will do in unforeseen contingencies."* — Kreps (1990) *"Culture is public because meaning is."* — Geertz (1973), via Gibbons *"Building culture = building equilibria; both face clarity problem."* — Gibbons (2025)