An ecology of agency arrangements: mortality of savings and loan associations, 1960-1987

Administrative Science Quarterly, Sept, 1992 by Hayagreeva Rao, Eric H. Nielsen

Ecological researchers conceptualize interpopulation competition and intrapopulation competition by building on the idea that the addition of a competitor in the environment lowers the capacity of the environment to sustain organizations. When numbers are small and resources are relatively abundant, then the likelihood and intensity of competition diminish. When the density of organizations increases, competition is intensified. Rising density increases direct and diffuse competition. In contrast to direct competition, which obtains when pairs of organizations engage in head-to-head competition, diffuse competition is indirect and obtains among anonymous organizations. If direct competition is strategic and conscious, diffuse competition is passive and even unconscious. As the number of organizations grows, organizations cannot avoid direct head-to-head competition with other organizations. Since there are |N.sup.2~/2 - N/2 possible pairwise competitive interactions in a population of N organizations, it becomes difficult for any organization to devise and sustain a coherent strategy. Rising density also multiplies diffuse competition at an increasing rate because variations in the higher ranges of density have a greater effect than changes in the lower ranges. The potential for competition increases geometrically as density increases linearly (Hannan and Carroll, 1992). Because intense competition exhausts the supplies of patrons, resources, members, and trained organization builders, it increases the mortality of organizations and reduces the formation of new organizations. Competition thus constrains organizational diversity and heightens structural homogeneity (Hannan and Freeman, 1989).

Ecological models of organizations also hold that environmental variability, or the variance of a series around its mean, constrains organizational diversity by complicating the problem of reliable performance (Freeman and Hannan, 1983). Organizations need excess resources to sustain reliable performances in the face of environmental variability. When excess resources are absorbed in the form of excess costs and perquisites, it is hard to recover them, because any attempt to recover them entails a disturbance of organizational routines (Hannan and Freeman, 1989: 106). Routines are also truces among contending interest groups in an organization, and any attempt to alter them intensifies conflict within organizations (Nelson and Winter, 1982). By contrast, unabsorbed excess resources enable an organization to respond easily to changing conditions because they are uncommitted to specific uses.

Whether excess resources are absorbed or unabsorbed depends in part on the structure of incentives and monitoring in organizations. When there is negligible monitoring and managers have minimal incentives to act as entrepreneurs but considerable incentives to extract resources in the form of indirect benefits such as perquisites, the absorption of slack increases, impeding reliable performance in the face of environmental variability. When the structure of incentives and monitoring encourages the absorption of slack resources, organizations are more likely to succumb to environmental variability, and organizational diversity is more likely to be diminished. Conversely, when the structure of incentives and monitoring discourage the absorption of slack resources, organizations can use excess slack to sustain reliable performance when faced with environmental variability.