A Change Would Do You Good . . . An Experimental Study on How to Overcome Coordination Failure in Organizations

Many organizations suffer poor performance because individuals within the organization fail to coordinate on efficient patterns of behavior. Using controlled laboratory experiments, we study how financial incentives can be used to find a way out of such performance traps. 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 employees is a weak-link game. In an initial phase, the benefits of coordination are low relative to the cost of increased effort. Play in this initial phase typically converges to an inefficient outcome with employees failing to coordinate at high effort levels. The experimental design then explores the effects of varying the financial incentives to coordinate at a higher effort level. We find that an increase in the benefits of coordination leads to improved coordination, but, surprisingly, large increases have no more impact than small increases. Once subjIncentives, Coordination, Experiments, Organizations

"Observability and Overcoming Coordination Failure in Organizations"

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 experimentaIncentives, Coordination, Observation, Experiments, Organizations

Role Selection and Team Performance

Team success relies on assigning team members to the right tasks. We use controlled experiments to study how roles are assigned within teams and how this affects team performance. Subjects play the takeover game in pairs consisting of a buyer and a seller. Understanding optimal play is very demanding for buyers and trivial for sellers. Teams perform better when roles are assigned endogenously or teammates are allowed to chat about their decisions, but the interaction effect between endogenous role assignment and chat unexpectedly worsens team performance. We argue that ego depletion provides a likely explanation for this surprising result.role selection in teams, team performance, takeover game, winner's curse, communication, experiment

Understanding Overbidding in Second Price Auctions: An Experimental Study

This paper presents results from a series of second price private value auction (SPA) experiments in which bidders are either given for free, or are allowed to purchase, noisy signals about their opponents' value. Even though theoretically such information about opponents' value has no strategic use in the SPA, it provides us with a convenient instrument to change bidders' perception about the "strength" (i.e., the value) of their opponent. We argue that the empirical relationship between the incidence and magnitude of overbidding and bidders' perception of the strength of their opponent provides the key to understand whether overbidding in second price auctions are driven by "spite" motives or by the "joy of winning." The experimental data show that bidders are much more likely to overbid, though less likely to submit large overbid, when they perceive their rivals to have similar values as their own. We argue that this empirical relationship is more consistent with a modified "joy of winning" hypothesis than with the "spite" hypothesis. However, neither of the non-standard preference explanations are able to fully explain all aspects of the experimental data, and we argue for the important role of bounded rationality. We also find that bidder heterogeneity plays an important role in explaining their bidding behavior.Overbidding, Second price auctions, Spite, Joy of winning, Bounded rationality

It's What You Say Not What You Pay

We study manager-employee interactions in experiments set in a corporate environment where payoffs depend on employees coordinating at high effort levels; the underlying game being played repeatedly by employees is a weak-link game. In the absence of managerial intervention subjects invariably slip into coordination failure. To overcome a history of coordination failure, managers have two instruments at their disposal, increasing employees' financial incentives to coordinate and communication with employees. We find that communication is a more effective tool than incentive changes for leading organizations out of performance traps. Examining the content of managers' communication, the most effective messages specifically request a high effort, point out the mutual benefits of high effort, and imply that employees are being paid well.Change, Incentives, Coordination, Communication, Experiments, Organizations

Role selection and team performance

Team success relies on assigning team members to the right tasks. We use controlled experiments to study how roles are assigned within teams and how this affects team performance. Subjects play the takeover game in pairs consisting of a buyer and a seller. Understanding optimal play is very demanding for buyers and trivial for sellers. Teams perform better when roles are assigned endogenously or teammates are allowed to chat about their decisions, but the interaction effect between endogenous role assignment and chat unexpectedly worsens team performance. We argue that ego depletion provides a likely explanation for this surprising result.Role selection in teams, team performance, takeover game, winner’s curse, communication, experiment

"Managed Care, Physician Incentives, and Norms of Medical Practice: Racing to the Bottom or Pulling to the Top?"

The incentive contracts that managed care organizations write with physicians have generated considerable controversy. Critics fear that if informational asymmetries inhibit patients from directly assessing the quality of care provided by their physician, competition will lead to a "race to the bottom" in which managed care plans induce physicians to offer only minimal levels of care. To analyze this issue we propose a model of competition between managed care organizations. The model serves for both physician incentive contracts and HMO product market strategies in an environment of extreme information asymmetry--physicians perceive quality of care perfectly, and patients don't perceive it at all. We find that even in this stark setting, managed care organizations need not race to the bottom. Rather, the combination of product differentiation and physician practice norms causes managed care organizations to race to differing market niches, with some providing high levels of care as a means of assembling large physician networks. We also find that relative physician practice norms, defined endogenously by the standards of medical care prevailing in a market, exert a "pull to the top" that raises the quality of care provided by all managed care organizations in the market. We conclude by considering the implications of our model for public policies designed to limit the influence of HMO incentive systems.

Entrepreneurship and Team Participation: An Experimental Study

Entrepreneurs are surprisingly unlikely to have partners. In spite of the obvious advantages to forming partnerships, only a small minority of entrepreneurs (less than 10%, excluding family businesses) have partners. A number of possible explanations exist for this puzzling phenomenon, including an inability to locate suitable partners, fear of free-riding by partners, and a preference for not working in groups. Utilizing a diverse subject population with a high proportion of active entrepreneurs, we use a team production experiment to study whether entrepreneurs prefer to work alone or in a team. The data indicate that entrepreneurs, while no more likely to free-ride on their teammates, are substantially less interested in joining teams. This suggests that efforts to encourage partnership among entrepreneurs may run contrary to the preferences of this group.Entrepreneurship, Teams, Artefactual Field Experiment

"Physician Incentives In Managed Care Organizations: Medical Practice Norms and the Quality of Care"

This brief considers the interaction between physician incentive systems and product market competition in the delivery of medical services via managed care organizations. At the center of the analysis is the process by which health maintenance organizations (HMOs) assemble physician networks and the role these networks play in the competition for customers. The authors find that although physician practice styles respond to financial incentives, there is little evidence that HMO cost-containment incentives cause a discernable reduction in care quality. They propose a model of the managed care marketplace that solves for both physician incentive contracts and HMO product market strategies in an environment of extreme information asymmetry: physicians perceive the quality of care they offer perfectly and their patients do not perceive it at all.

Is unemployment and low income harmful to health? : Evidence from Britain

ACKNOWLEDGEMENTS The authors thank Ian McAvinchey for helpful comments. FUNDING This work was financially supported by the European Commission under the Fifth Framework Programme “Quality of Life and Management of Living Resources” [grant number QLRT-2001-02292].Peer reviewedPostprin