The Role of Behavioral Microfoundations on the Optimal Organizational Adoption of New Practices

Most large organizations face challenges when trying to effectively introduce new operational practices that substitute existing ones. We study how the social dynamics due to social comparisons between employees gives rise to individual strategic considerations, and eventually shapes the adoption outcome of the firm. We develop an evolutionary game theory model that accounts for these micro-level individual adoption decisions, and their impact on macro-level population adoption equilibria. Social comparisons invoke dynamics that expand the possible outcomes beyond the traditional no-adoption versus full adoption dichotomy. Ahead seeking social comparisons drive the long-term coexistence of practices, because employees seek to differentiate their choices from others'. Meanwhile, behind averse comparisons create a bandwagon effect that determines adoption depending on the initial mass of adopters, i.e., employees who are trained upfront. These dynamics are robust to heterogeneous employee characteristics and positive utility externalities from joint adoption of the practice. Moreover, they persist even when organizations optimize their profit from introduction of the new practice, through upfront training and adoption rewards. Our results call for senior managers to diagnose, and measure such behavioral traits to appropriately manage the introduction of new practices, since profitable adoption, or in some cases, any adoption, relies upon matching rewards and training to the type of social comparisons present. Interestingly, we show under which circumstances the sheer presence of social comparisons benefits the adopting organization