Solving Coordination Failure with All-or-None Group-Level Incentives

Abstract

Coordinating activity among members is an important problem faced by organizations. When firms, or units within firms, are stuck in bad equilibria, managers may turn to the temporary use of simple incentives - flat punishments or rewards - in an attempt to transition the firm or unit to a more efficient equilibrium. We investigate the use of incentives in the context of the minimum-effort, or weak-link, coordination game. We allow groups to reach the inefficient equilibrium and then implement temporary, flat, all-or-none incentives to encourage coordination on more efficient equilibria. We vary whether the incentives are positive (rewards) or negative (penalties), whether they have substantial or nominal monetary value, and whether they are targeted to a specific outcome (the efficient equilibrium) or untargeted (and apply to more than one outcome). Overall, incentives of all kinds are effective at improving coordination while they are in place, and we find that substantial and targeted incentives are most effective. However, there is little long-term persistent benefit of incentives - once the incentives are removed, groups tend to return to the inefficient outcome.