Externalities, incentives and strategic complementarities: understanding herd behavior in IT adoption

Abstract

Herd behavior arises in many instances of information technology (IT) adoption. This study examines the economic and behavioral bases for herd behavior and decision conformity. We investigate the roles of payoff externalities, observational learning and managerial incentives in influencing IT adoption decision-making. Our study underscores the benefits of viewing various drivers of IT adoption herding in a unified framework focusing on equilibrium coordination under strategic complementarities. Motivated by the recent advance in behavioral economics and behavioral game theory, our study relates IT adoption herding to a range of individual-level problems, including managerial incentives, managerial behavioral biases and limited rationality. We develop a coordination game of IT adoption within the unified framework. Our analysis of the game demonstrates that, under strategic complementarities, behavioral biases or incentive problems of a small minority of decision-makers may dramatically impact aggregate outcomes.