The dynamics of incentive contracting The role of learning in the diffusion process

Research shows that innovations diffuse gradually rather than rapidly because their usefulness is not immediately apparent to some adopters These adopters need to learn about the value of the innovation prior to adoption Although the Importance of learning is recognized in most analytical diffusion models few studies have actually empirically examined the role of learning in the diffusion process In this paper we fill this void in the literature by empirically examining the initial adoption and subsequent diffusion process of a performance-based incentive system within a cooperative bank Based on both qualitative and quantitative field data we find that agency theory variables explain early adoption When we examine a longer horizon we find that although not all local banks adopted immediately within 3 years almost all local banks had done so We analyze this process and find that extensive learning-by-doing and strong subsequent learning spillovers led to this relatively rapid diffusion of the system We further find that the probability with which an initial non-adopter adopts the new incentive system in the next period depends on the strength of that local bank s social network. (C) 2010 Elsevier Ltd All rights reserved