Observability and Overcoming Coordination Failure in Organizations. An Experimental Study

Abstract

Many organizations suffer poor performance because its members fail to coordinate on efficient patterns of behavior. In previous research, we have shown that financial incentives can be used to find a way out of such performance traps. Here we examine the sensitivity of this result to the ability of people to observe others' choices. Our experiments are set in a corporate environment where subjects' payoffs depend on coordinating at high effort levels; the underlying game being played repeatedly by the employees of an experimental firm is a weak-link game. Treatments vary along two dimensions. First, subjects either start with low financial incentives for coordination, which typically leads to coordination failure, and then are switched to higher incentives or start with high incentives, which typically yield effective coordination, and are switched to low incentives. Second, as the key treatment variable, subjects either observe the effort levels chosen by all employees in their experimental firm (full feedback) or observe only the minimum effort (limited feedback). We find three primary results: (1) The use of full feedback improves the ability of organizations to overcome coordination failure, (2) The use of full feedback has no effect on the ability of successful organizations to avoid slipping into coordination failure, and (3) History-dependence is strengthened by the use of full feedback.