Brandts Cooper AER 2006

American Economic Association
A Change Would Do You Good .... An Experimental Study on How to Overcome Coordination
Failure in Organizations
Author(s): Jordi Brandts and David J. Cooper
Source: The American Economic Review, Vol. 96, No. 3 (Jun., 2006), pp. 669-693
Published by: American Economic Association
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A Change WouldDo You Good .... An Experimental
Studyon
Howto OvercomeCoordination
FailureinOrganizations
By JORDIBRANDTSANDDAVID J. COOPER*
Westudyhowfinancialincentives can be usedtoovercomea history ofcoordination

failureusingcontrolledlaboratory experiments.Subjects'payoffs dependon coor-
dinatingat higheffortlevels.In an initialphase, thebenefitsof coordinationare
low,andplaytypically converges to an outcome.
inefficient We thenexplorevarying
financialincentives
tocoordinateat a highereffort level.An increasein thebenefits
ofcoordinationleads to improved coordination,butlarge increaseshave no more
impactthansmall increases.Once subjectshave coordinatedon a highereffort
in theincentives
level,reductions to coordinatehavelittleeffecton behavior.(JEL
C92, D23, J31,L23, M52)
Coordinationfailurecan cause corporations elsewhere.Only if our hypothetical workeris

and otherorganizations to become trappedin reasonably certain that otherswill also be work-
situationsthat are unsatisfactory for all in- ing hardershouldhe be willingto increasehis
volved,even thoughpreferableoutcomesare effort.Thus,overcoming coordination failureis
possibleand would be stableif ever reached. a questionof coordinated change.In thispaper
Even if thebenefitsof improvedcoordination we studycontrolled laboratory experiments that
are obvious, any process designedto bring simulatedifficult environments ofthissort.Our
abouta changeforthebetterfaces substantial goal is to explorehowa history ofcoordination
obstacles.As an archetypicalexample,imagine failurecan best be overcomeusing financial
a firmproducing via an assemblylinewherethe incentives.
slowestworkerdetermines thespeedof theen- The answerto thisquestionis of realimpor-
tireline.All theworkersare exerting minimal tance,since coordination failureas described
effort,butcouldbe betteroffif all triedharder above plays a centralrole in a numberof im-
andthelinebecamemoreproductive. However, portant economicsettings. Our researchis mo-
any workerwho unilaterally begins to work tivatedprimarily by theproblemspresented by
harderwasteshis effortif slow workpersists turningarounda failingcorporation. One in-
sightemergingfromthe extensiveeconomics
and management literatureson organizational
* Brandts:Institut
d'AnhlisiEconbmica(CSIC), Campus changeis thatthepresenceof complementari-
UAB, 08193 Bellaterra (Barcelona), Spain (e-mail: tiesis at therootof manyorganizational prob-
jordi.brandts@uab.es);Cooper:Department of Economics, lems.1In settings wherelow effort fromanyone
WeatherheadSchool of Management, Case WesternRe- individual(or unit)can destroyoverallproduc-
serve University, 10900 Euclid Avenue,Cleveland,OH
44106-7206(e-mail:david.cooper@case.edu). The authors tivity,coordinated changeis necessaryto im-
thanktheNationalScienceFoundation(SES-0214310),the prove profitability. Similar issues play an
Spanish Ministeriode Educaci6n y Cultura (SEC2002- importantrole in developmenteconomics.
01352),theBBVA Foundation, andtheBarcelonaEconom-
Countriesmayfailto developwhenthesimul-
ics Programof CREA for financialhelp, Bethia Cullis,
Adam Malinowski,David Rodriguez,Micah Sanders,and taneousindustrialization of manysectorsof an
Amanda Starc for skillfulresearchassistance,and Eric economy can be profitableforeach ofthem,but
Bettinger,Colin Camerer,Vince Crawford, CharlieHolt,
MurielNiederle,JimRebitzer, MariRege,Al Roth,Roberto
Weber,threeanonymous and Doug Bernheimfor
referees,
usefulcomments. 1
We are gratefulto Colin Camerer,Teck For examples,see Marc Knez and DuncanSimester's
Ho, andJuinKuanKo, whosharedtheirsoftware forfitting (2001) studyofContinental Airlines'turnaround
andCasey
EWA withus. Ichniowskiet al.'s (1997) studyof steelproduction.
669

670 THE AMERICANECONOMIC REVIEW JUNE2006
no sectorcan breakevenindustrializing alone.2 large changes in the bonus rate lead to no

The policyquestionin thiscontextis how to greater improvementin coordinationthan
createa "big push" whichtakes an economy smallerincreases.In cases wherea bonus in-
froman underdeveloped stateto one of greater creaseleads to improvedcoordination, thebo-
prosperity.In ourterms,thehopeis to produce nus can subsequentlybe reducedwithouta
coordinated change. significant impacton behavior.In otherwords,
We studyan experimental environment, la- the temporary applicationof positiveincen-
beled the"corporate turnaround game," which tives-"shock therapy"-canhave a persistent
is designedto simulatea corporate environment impact.Finally,we findthatthelengthof time
in whichcoordination failurehas occurred.We a firmhas experiencedcoordinationfailure
thensystematically studytheeffectsof chang- weakensbutdoes noteliminatetheimpactof a
ing incentives.More specifically, thecorporate bonusrateincrease.
turnaround game involvesrepeatedplay of a To understand theseresults,thecoordination
gameamongfour"employees"ofa "firm." The problemfacingsubjectsmust be formulated
productivity and profitability of the firm are correctly. It is tempting to focuson thecoordi-
determined bytheminimum effort levelchosen nationproblemwithin theframework ofa single
by its fouremployees,a verystrongformof roundand a singleplayoftheweak-link game.
complementarity. The keyvariableintheexper- However,the"corporate turnaround game"is a
imentsis a bonus rate set by an exogenous repeatedgamewithmanyroundsand changing
manager.This bonusratedetermines thefrac- bonusrates.In an inherently dynamicenviron-
tionof thefirm'sprofits transferred to theem- mentlike this,no singleroundcan be consid-
ployees and hence governsthe benefitto the ered in isolation.We proposethatthe central
fouremployeesof coordinating at a higheffort problemfacingemployeesisn'twhether to co-
level. Once thebonusrateis known,thegame ordinatebutrather howandwhento coordinate.
playedby theemployeesforanyone roundof The weak-link gameisn'ta particularly compli-
the corporateturnaround game is a weak-link catedgameto understand. Aftera fewperiods
game.Initially,employeesfacea lowbonusrate of play,undoubtedly mostsubjectsrealizethat
and,byextension, low incentives to coordinate. all wouldbe betteroffiftheycouldcoordinate
Under these circumstances, the experimental at the highesteffortlevel. However,one em-
"firms"typicallybecome coordinatedat the ployeeactingalone standslittlechanceof suc-
leastefficientpossibleoutcome.We thenfocus cess. Breakingthetrapof coordination failure
on fourquestions:(1) Can an increasein the requiresa coordinatedmove to highereffort
bonusrateenablethefirmto overcomeits co- levels. An increasein thebonusrateprovides
ordination failure?(2) Does the magnitudeof thenecessarycoordinating device.If we lookat
thebonusrateincreasematteror is thesimple theindividual-level data,virtually all employ-
factof an increaseeffective as such?(3) If an ees respondto an increasein thebonusrateby
increasein the bonus rate bringsabout im- bumpingup theireffort levelsregardless of the
provedcoordination, canthebonusrateincrease size of theincrease.If enoughemployeesmake
be revokedwithout affecting theimprovedout- a largeincreaseto theireffort level,otherem-
come? (4) Does thelengthof timea firmhas ployees will generallyfollow their lead andthe
been underperforming affecttheimpactof the firmwill overcomeits historyof coordination
increase? failure.The bonusincreaseis moreimportant as
The experimentaldata yield some unex- a trigger starting theprocessof changethanas
pected answersto these questions.As most a determinant of theeventualquantitative out-
economistswouldexpect,increasing thebonus come of thisprocess.This also explainswhy
rateleads to an improvement in coordination cutting thebonusrategenerallydoesn'tunder-
amongemployees.Surprisingly, themagnitude minesuccessfulcoordination-the primary ef-
of the bonus rate increasedoesn't matter,as fect of increasingthe bonus, coordinating a
mutually desirableshiftto highereffort levels,
isn'trelevantforfirmsthatare alreadycoordi-
2
See Paul Rosenstein-Rodan
natedand face a decreasedbonusrate.
(1943), AlbertO. Hirsch-
man (1958), KevinM. Murphyet al. (1989), and Antonio In an attemptto model the dynamicsob-
Cicconeand KiminoriMatsuyama(1996). servedin theturnaround game,we turnto the

VOL. 96 NO. 3 BRANDTSAND COOPER: A CHANGE WOULD DO YOU GOOD 671
experienceweightedattraction modelof learn- a playerto raisehis effortlevel ifand onlyifit

ingin games(ColinCamererandTeck-HuaHo, willincreasetheminimum effort forthegroup.
1999). This modelcannottrackthestrongpos- Coordinating on anyone of theavailableeffort
itiveresponsetoincreasesinthebonusrate.The levels is a Nash equilibrium, but resultsfrom
problemis thatovercoming coordinationfailure earlierexperiments suggestthatplay typically
requiresresponsivefollowersas well as strong evolves towardthe payoff-dominated equilib-
leaders.In the experimental data, employees riumwhereall playerschoose thelowestpos-
who do notinitiallyrespondto an increasein sibleeffort level.3Havingreachedthisworstof
thebonusrateoftenincreasetheireffort levels all possibleoutcomes,improvement can occur
strongly in subsequentrounds.These subjects onlyifall playersincreasetheireffort levels.By
may not starttheprocessof change,butthey studying a productiontechnology witha weak-
providethe momentum to keep it going. In linkstructure, we focuson a worst-case scenario.
simulationsof the learningmodel,employees Presumably manyorganizations face coordina-
whodo notimmediately respondto an increase tionproblemsin moreforgiving settings,butif
in thebonusgenerallyneverlearnto increase we canunderstand howtoovercome coordination
theireffort,and henceweardowntheattempts failurein a toughenvironment, it shouldbe even
of leadersto moveto a betterequilibrium. We easierin less difficult
circumstances.
discussmodifications of themodelthatallow it
to capturethepresenceofresponsive followers. ASSUMPTION 2: Employeescan observethe
SectionI introducestheturnaround gameand effortlevels of all otheremployees,butfirm
relates our work to previousstudiesof the managerscan observeonlytheminimum effort
weak-linkgame.SectionII outlinestheexperi- chosen.
mentaldesignand ourpreliminary hypotheses.
SectionIII presentstheprocedures. SectionIV This impliesthatthemanagerlacksthenec-
summarizesthe experimental resultsand ex- essaryinformation totailorbonusestotheeffort
plorestheabilityof learningmodelsto capture putforth by individuals,and can offerbonuses
themainfeatures ofthedata.SectionV presents onlybased on theminimum effortoverall em-
somefinalremarks and comparesourresultsto ployees.Thereis no particularreasonto believe
thosefromrelatedexperiments. thatourgameis eithermoreor less realisticfor
theinformation
restricting aboutemployeeef-
I. The Corporate
Turnaround
Game fortavailableto managers.We decidedto limit
the manager'sinformation for two reasons.
This sectionbeginsby discussingthreebasic First, limitingthe instruments available to
assumptions thatinformourdesignof thecor- changeemployees'behaviormakesit tougher
porateturnaround game.We thenintroduce the to turnarounda failingfirm.Presumably the
detailsof thegame. lessonslearnedfromsucha harshenvironment
willalso be valuablein moreforgiving settings.
ASSUMPTION 1: Thefirm'stechnology
has a Additionally, limitingthe manager'sinforma-
weak-link
structure. tiongreatlysimplifies theenvironment.
As describedby MichaelKremer(1993), for

manyorganizations theindividual(or unit)do-
ing theworstjob-the weak link-determines
the overall productivityof an organization. 3 For
example,Van Huycket al. (1990) ran sevenses-
Startingfrom this Knez and Cam-
observation, sions of a minimum gamewith14-16 inexperienced sub-
erer(1994) arguethatthegame playedwithin jects. By theend of thetenthround,theminimum strategy
chosenforall sevensessionswas thelowestpossiblechoice,
manyfirms takeson theformofthe"minimum and 72 percentof thesubjectsselectedthelowestpossible
game"introduced byJohnB. Van Huycket al. choice.Knez and Camerer(1994 and 2000) reportsimilar
(1990). Players simultaneouslychoose effort results.These resultsare sensitiveto the groupsize. For
levels,andtheirpayoffs
area decreasingfunction example,withtwo-player groups,theParetodominant out-
come, coordination on the highesteffortlevel, is almost
oftheirowneffort andan increasingfunctionof alwaysobservedaftertenrounds.See also thehighcoordi-
theminimum effort
chosenbytheplayersin the nationratesin three-player groupsreportedin RobertoA.
group.Payoffsaresuchthatitis worthwhile for Weberet al. (2004).

ASSUMPTION 3: The only instrument of (1) Firm: rF= 100 + [(60 - 4B)
changecontrolled
bymanagersis a bonusrate
based on theminimum
effort
ofemployees. X min (E,)];
iE{1,2,3,4}
In reality,
managers oftenemploymorecom-
plex financialincentives thanthesimplelinear (2) Employeei: e, = 200 - 5Ei
schemeemployedhere,as wellas nonpecuniary
instruments suchas improving communication + (B x min (Ei)).
orbuildingtrust.Ourgoal,however,is to study iE{1,2,3,4}
a simpleenvironment whereonlyone variable
changes.Only afterunderstanding how rela- Theseprofit functions areconsistent withAs-
tivelysimplefinancial incentives perform can we sumptions 1 to 3 as describedabove.The bonus
to
begin study more complex incentive schemes transfers a portionof the firm'sprofitsto its
and theinteractions betweenchangesin finan- employees.This underliesour interestin the
cial incentives and nonpecuniary instruments. abilityof temporary increasesin thebonusrate
Turningto the specificsof the turnaround to increasepersistently employees'efforts-
game,theplayersin our turnaround game are highbonusesmaybe effective at increasing
the
themanagerand fouremployeesof a firm.For firm'srevenues,but this move will be self-
all the experimental sessionsreportedbelow, defeatingif these increasedrevenuesaccrue
theexperimenter playstheroleofthefirmman- largelyto theemployeesas increasedbonuses.
ager while subjectsfillthe roles of the four Giventhatthemanageris exogenousin the
employees.4 Even thoughthemanager'schoices experiments reported below,we now focuson
are exogenous,forexpositionalpurposesit is the propersubgamewhereemployeeschoose
usefulto treatthe manageras a playerin the effortlevels. Table 1 displaysthe payoffsin-
game.The gamestarts witha predetermined flat ducedforthissubgamebythefourbonuslevels
wage thateach employeereceivesregardless usedin ourexperiments (B = 6, 8, 10,and 14).
of theoutcomeand a bonusrate(B), setby the For all valuesof thebonusrate,B, used in our
firmmanager,whichdetermines how muchad- experiments theresulting game is a weak-link
ditionalpay each employeereceivesper unit game.Coordinating anyofthefiveavailable
on
increasein theminimum effort.Employeesob- effortlevelsis a Nash equilibrium.
servethemanager'schoiceofB andthensimul- To understand whyovercoming coordination
taneouslychoose effort levels,whereEi is the failuremaydependon thebonuslevel,consider
effortlevel chosen by the ith employee.We thegame inducedby a bonusvalue of B = 6.
restrict an employee'seffort to be in ten-hour Suppose thatall fouremployeeshave previ-
increments: Ei E {0, 10, 20, 30, 40}. Intu- ouslychoseneffort level 0. An employeewho
itively,employeesspend40 hoursperweekon thinksaboutraisinghiseffort from0 to 10 faces
thejob, andeffort measuresthenumber ofthese a certainpayoffreduction of 50 pesetasdue to
hoursthattheyactuallyworkhardratherthan increasedeffort, while his maximumpossible
loafing.The payoffsare givenby equations(1) gain only pesetasbeyondthe200 pesetas
is 10
and(2). All payoffs aredenominated in "exper- he gets withoutrisk by choosing0. For the
imentalpesetas."Thesewereconverted tomon- proposedincreaseto have a positiveexpected
etarypayoffsat a rateof one dollaror one euro profit,theemployeemustbelievetheprobabil-
equal to 500 experimental pesetas: ityof thethreeotheremployeessimultaneously
raisingtheirefforts from0 to 10 equals at least
5/6. Given these grimincentives,overcoming
coordination failureis highlyunlikely.Witha
higherbonuslevelitis stilldifficult togetoutof
4 Makingthe
managerexogenousallowedus to control
how the bonus ratechangedover timeratherthanbeing the low-effort trap, but the odds are less
dependenton randomvariationin the bonus ratesset by intimidating.
subjectsactingas managers.Whatbonusrateswouldbe set This bringsus to the centralfeatureof our
by subject-managers and how employees'responsesare
affectedbytheuse ofa subjectas themanagerareimportant experimental design.Our focusis noton com-
but separatequestionswhichwe examinein a companion parative static results.Whiletheimprovedin-
paper(Brandtsand Cooper,2005). centivesinducedby a higherbonus ratemay

TABLE1-PAYOFFTABLES ing, but also potentially

correlatechangesin
employee'seffortlevels. Our analysislargely
Employeei's payofftable,B = 6 revolvesarounddisentangling the impactof
Minimumeffort
by other thesetwo effectsin overcomingcoordination
employees failure.
0 10 20 30 40
Effort
by employeei 0 200 200 200 200 200 Designand Hypotheses
II. Experimental
10 150 210 210 210 210
20 100 160 220 220 220 Subjectsplayed 30 roundsin fixedgroups
30 50 110 170 230 230 ("firms")of foursubjects("employees").Dur-
40 0 60 120 180 240
ing a sessionthebonusratechangedin a pre-
determined way. Otherthanthebonusrate,no
Employeei's payofftable,B = 8 detailof the experimental environment varied
Minimumeffort
by other betweenroundsorbetweensessions.The bonus
employees rate and resultingpayoffmatriceswere an-
0 10 20 30 40 nouncedat thebeginningof each of thethree
Effort
ten-round blocks and were fixedduringthat
by employeei 0 200 200 200 200 200
10 150 230 230 230 230 timeframe.While playingin a block witha
20 100 180 260 260 260 particularbonus rate,subjectsdid not know
30 50 130 210 290 290 whatthe bonus rate would be in subsequent
40 0 80 160 240 320 ten-round blocks.
The bonusratewas alwaysfixedatB = 6 for
Employeei's payofftable,B = 10 the firstten-round block. This is the lowest
Minimumeffort
by other (integer)bonusratethatdoes notmakechoos-
employees ing positiveeffortlevels a dominatedstrategy.
0 10 20 30 40 The goal was to geta highpercentage of firms
Effort
coordinatedon the inefficient outcomewith
by employeei 0 200 200 200 200 200
10 150 250 250 250 250 minimumeffortequal to zero. Based on the
20 100 200 300 300 300 resultsof earlierexperiments withweak-link
30 50 150 250 350 350 games(Van Huycket al., 1990;Knez andCam-
40 0 100 200 300 400
erer,1994 and 2000), it wouldbe surprising if
coordination failuredid notgenerallyoccurin
Employeei's payofftable,B = 14 thisfirstblockof games.
Minimumeffort
by other The treatments varythebonusratesforthe
employees second and thirdblocks of ten rounds.The
0 10 20 30 40 intentis toexplorehowfinancial incentivescan
Effort
bestbe usedas a toolto overcomecoordination
by employeei 0 200 200 200 200 200
10 150 290 290 290 290 failure.The experimental design,as summa-
20 100 240 380 380 380 rizedin Table 2, focuseson thefourquestions
30 50 190 330 470 470 presented in theintroduction:(1) Can firmsbe
40 0 140 280 420 560 extricated froman initialbad outcomeby in-
creasingthebonusrate?(2) Does thesize ofthe
increasematter?(3) Does the bonus increase
affectthebehaviorof subjectswithno previous need to be permanent? (4) Does delayingthe
experience,5we insteadconcentrateon how bonusincreasereduceitsefficacy?
subjectswhohavepreviously experienceda his- Both as a tool forexplainingthe rationale
toryof coordinationfailurereactto changing underlying the experimental design and as a
incentives.Bonus rateincreasesmake the in- meansoforganizing theresults,we nowpresent
centiveproblemfacingemployeesless daunt- threeex antehypotheses abouttheexperimental
data and relateeach of thesehypotheses to the
purposesof theexperimental design.
5 ResultsfromBrandtsand Cooper (forthcoming)
sup- Hypothesis1 focuseson choicesin thesec-
portthishypothesis. ondblockoftenrounds.Assumingthatmanyof

TABLE 2-LIST OF TREATMENTS
Cell 1 Cell 2 Cell 3 Cell 4 Cell 5 Cell 6

Bonusrate,rounds1-10 6 6 6 6 6 6
thefirmswillhaveconvergedto an effort level thatsubjectscan overcometheweakened

strong
of zero overthefirst tenrounds,thebonusrate incentives
to coordinate.
in cells 1-5 is nowincreasedto see iffirms can
be extricated fromthisinefficient outcome.We HYPOTHESIS 2: Decreasing the bonus rate
varythesize ofthebonusincreasebetweencells in rounds21-30 willnotlead to a decreaseof
to determine if the magnitudeof the increase averageminimum to thelevelof rounds
effort
matters.For cells 1, 4, and 5, the bonus rate 1-10.
increasesto B = 14 for rounds 11-20, the
maximumamountat whichthefirmstillearns Hypothesis3 considerstheimpactof delay-
some profit.Cells 2 and 3 employsmallerin- ingthebonusrateincrease.In cell 6, thebonus
creases,B = 10 andB = 8, respectively. Cell 6, rateremainsatB = 6 forrounds11-20 andthen
withno changein the bonus rate forrounds increasesto B = 14 forrounds21-30. This
11-20,actsas a controlforpurerestart effects. gives firmsan additionalten rounds,as com-
Eventhoughthebonusrateisn'tchanging, play paredto cells 1, 4, and 5, to get stuckat an
also stopsforcell 6 priorto round11 and the inefficient
outcome.Hypothesis 3 is againbased
(unaltered) bonusrateis announced. Hypothesis on simpleintuition, predictingthathistoryde-
1 drawson the standardintuition thatpeople pendenceis moredifficult to overcomevia im-
respondmonotonically to increasingincentives. proved incentives when subjectshave lengthy
experiencewith coordination failure.
HYPOTHESIS 1: (a) Increasing the bonus
rate in round11 will cause theaveragemini- HYPOTHESIS 3: Increasingthe bonus will
mumeffortto increase. (b) The increase in have a smallereffectafter20 roundswithB =
average minimum will be increasingin
effort 6 thanafterjust tenrounds.
the new bonus rate. (c) Therewill be no in-
crease in average minimum effortfor rounds
11-20 in cell 6, thecontrols. IIIH.Procedures
Hypothesis2 focuseson behaviorin rounds Sessionswererunat PompeuFabraUniver-

21-30. Suppose Hypothesis1 is borneout by sityandat Case Western ReserveUniversity. In
the data. Althoughthe firmhas increasedits bothcases,a computerized lab was used to run
productivity,muchof theresulting increasein the sessions.Each treatment containsdata for
revenuemaybe departing thefirmvia increased fivefirmsat each of thetwo locations,so the
bonuses.Ideally,thefirmwouldliketokeepthe sampleis balanced.Ourfocushereis noton the
improved levelswithout
effort keepingbonuses cross-country comparison.The econometric
at a high level. Cells 1, 4, and 5 therefore analysiscontrolsforanylocationeffect, which
explorewhether thebonusratecanbe decreased turnsout to be secondary. For a detailedcom-
withoutsacrificingproductivity. In all three parisonof theresultsbetweenUPF and CASE,
cells the bonus rateincreasesto B = 14 for see SectionB.2 oftheon-lineAppendix atwww.
rounds11-20. In cell 4, thebonusrateis low- e-aer.org/data/june06_app_20040237.pdf.
eredtoB = 10 forrounds21-30. Cell 5 is more Subjectswererecruited fromtheundergrad-
extreme, returningthebonus rateto itsoriginal uate populations Pompeu Fabra and Case
at
level,B = 6, forrounds21-30. Cell 1 servesas using newspaperads, posters,and classroom
a control,keepingthebonusratefixedat B = announcements. Subjectswereallowedto par-
14. Hypothesis2 reflectsthe optimisticview ticipateonlyin a singlesession.Due to record-
that historydependencewill be sufficiently keepingerrors,two subjectsparticipated in a

secondsession.All data forthesesubjectsand adjustedto reflect thecurrent bonusrate.Atthe

theirfirms havebeendroppedfromthedataset.6 end of each round,each employeewas toldhis
Forthemostpart,theexperimental procedures effort level,theminimum effortforhisfirm, his
werequite standard.At thebeginningof each payoff forthe round,and his total
running pay-
session subjectsread the instructions directly offfortheexperiment. Separatewindowson the
fromtheircomputerscreens.Beforebeginning feedbackscreenshowedthema summaryof
play,all subjectswereaskedtocompletea short resultsfromearlierroundsand theeffort levels
quiz about the payoffsand the rules of the selectedforall fouremployeesin theirfirm.
experiment. The full textfor the instructions These effort levelsweresortedfromhighestto
and quiz is givenin theAppendix. lowest,and did notincludeanyidentifying in-
One slightlyunusualfeatureof the instruc- formation aboutwhichemployeewas responsi-
tionsis thatrather thanusingabstract terminol- ble forwhicheffortlevel. Note thatwe gave
ogy we employeda corporatecontext.For subjectsmorefeedbackabout the choices of
example,thefourplayersareexplicitly referred othersthan is typical;most minimumgame
to as "employees"and are told thattheyare experiments show subjectsonlythe minimum
workingfora "firm."We avoidedthe use of effort level chosenfortheirgroup.In a related
termswithstrongconnotations. For example, paper,we findthatgivingsubjectsinformation
insteadof askingsubjectsto choose a level of onlyabouttheminimum effort has littleimpact
"effort"and a level of "loafing,"theywere on thelikelihoodofcoordination failureemerg-
askedto allocatetimebetween"Activity A" and but
ing initially, substantially reduces thelike-
"Activity B," with these activitiesplayingthe lihoodthata successful turnaround occurswhen
roles of effortand loafing,respectively. We thebonusrateis increased(BrandtsandCooper,
used a corporatecontextto make the instruc- forthcoming).8
tionseasier to understand forparticipants,an Subjectsplayedthegamein a fixedcohortof
important issue forsome subjectpools used in fouremployees.These cohortsremainedcon-
thebroaderdesign.7We doubtthattheuse of a stantduringthecourseoftheexperiment, a fact
corporatecontextcauses any demand-induced thatwas stressedin theinstructions. Forexper-
effectsthathave an impacton our qualitative imenterswho are used to worrying aboutre-
results. peated game effects,this may seem like a
At the beginningof each ten-round block, strangedesignchoice. However,the fieldset-
employeeswereinformed of thebonusratefor tingsthatmotivated theseexperiments involve
thatblock.Employeeswerenottoldwhatbonus repeated interactions among the same agents.
rateswould be in subsequentblocks.In each Repeatedgame effectsand strategicteaching
round,the fouremployeesof a firmsimulta- are presumably quitenaturalin thesesettings.
neouslychose theireffort levels fortheround. Moreover,theuse offixedgroupshas theeffect
The screenwhereemployeesmadethisdecision of intensifying historydependence,a central
displayedthecurrent bonusrateandtheformula issue in ourdesign.As such,we thinkthatour
forthefirmmanager'spayoff.The latterinfor- experiments mustincorporate repeatedinterac-
mationis irrelevant here,butwas displayedto tionsto be a usefultool.9
maintain parallelismwithsessionswherea fifth In general,theseexperiments aredesignedto
subjectplayed as the firmmanager.The em- makeit possible,butnottrivial,to overcomea
ployeeswerealso showna payofftable,similar historyof coordinationfailure.For example,
to theones displayedin Table 1, showingtheir fouremployeesare used ratherthantwoor ten
payoffas a function oftheirowneffort leveland because it is too easy to coordinatewithonly
the minimum effortlevel chosenby the other two playersand too hardwithten. Likewise,
employees.Thispayofftablewas automatically allowingemployeesto observeall otherem-
ployees' choices in theirfirmmakesit easier
6 One affected firmwas in cell 2 and theotherwas in
cell 4. 8 See also SectionVI of Van Huycket al. (1990).
7 We have runrelatedexperiments usingcorporateex- 9 Most previousstudiesof weak-linkgameshave used
ecutives.For thispopulation,
havinga concretesettingfor fixedgroups.Fora comparison offixedandrandommatch-
theexperiment is importantin helpingsubjectsunderstand ing in weak-linkgames,see Treatment C of Van Huycket
theinstructions. al. (1990).

but,as shall be seen, nontrivial to overcome comedependson theminimum effortchosenby

coordination failure.We believe thatcases in an employeeofthefirm, thefirm-level datatend
whichbehavioris close to neitherboundary to accentuatetheimpactof outliers.Usingthe
(e.g., neither
0-percent nor 100-percent coordi- employee-leveldata allows us to ascertain
nation)give us the best opportunity to study whether thetreatment effects arebroadbasedor
howdiffering financialincentives workin over- have an impacton onlya relatively smallfrac-
comingcoordination failure. tionofthepopulation. In firm-level regressions,
At theend of the session,each subjectwas the dependentvariableis the firm'sminimum
paid in cash for all roundsplayed, plus a effort. Each play by a firmcountsas a single
show-upfee.Payoffsweredoneon an individ- observation. In employee-level data,thedepen-
ual and privatebasis. All payoffswerein "ex- dentvariableis theeffort level selectedby the
perimental pesetas."As mentioned previously, employee.Each play by a firmgeneratesfour
thesewereconverted to dollarsat a rateof one observations, one foreach of thefouremploy-
dollaror one euroto 500 experimental pesetas. ees. All of theregressions reported below are
Thisyieldedslightly highermarginal payoffsto orderedprobits.Giventhecategoricalnatureof
coordinationfor Spanish sessions. Since the thedata,thisis a naturalchoice.
conversionratebetweendollarsand euroswas A criticalpointin thisanalysisis how we
veryclose to one to one duringthetimeperiod controlforrepeatedobservations of the same
whensessionswererun(fall 2002), we doubt employeesor thesamefirms. We don'tbelieve
thishad anyimpacton theresults.Subjectsin thereis a "right"approachto this problem.
Clevelandreceiveda show-upfeeoftendollars Instead,thereis a tradeoff betweenminimizing
whilethe show-upfee was onlyfiveeurosin thelikelihoodoftype1 errors(falserejection of
Barcelona.The largershow-upfeein Cleveland the null) versusminimizing theprobability of
was deemed necessaryto insurean adequate type 2 errors(failingto correctlyrejectthe
supplyofsubjects.Thereis no reasontobelieve null). We therefore reportregressions usinga
thatthe differing show-upfees affectedour relativelyconservativeclusteringapproachto
results.The averagetotalpayoffwas $25.83 in correctingfor repeatedobservations,due to
Clevelandand 20.94 C in Barcelona.Once we Kung-yeeLiangandScottL. Zeger(1986)," as
accountforthediffering show-upfees,theav- well as regressionsusing a more powerful
erage earningsare almostidenticalacross the random-effects specification.These shouldbe
twolocations. viewedas setting boundson whatis actuallyin
thedata,withtheformer approachmorelikely
IV. Results to yieldtype2 errorsand thelattermorelikely
to yieldtype1 errors.12
Below we presentthreeregularities which Whiletherandom-effects specificationofthe
report resultscorresponding tothethreehypoth- firm-level data regressions is standard, thatof
eses introduced above.Ourconclusionsaresup- the employee-level regressionsis not. In the
portedby regressions both on firm-level data employee-level data we need to accountfor
and employee-level data.'0 While we are ulti- correlation betweentwo observations fromthe
matelyinterested inthefirm-level outcomes, the same employee,as well as correlation between
employee-level regressionsserveas a robust- twoobservations fromdifferent employeeswho
ness check.In particular, becausea firm'sout- are in thesame firm.We therefore have a ran-
domeffectat theemployeelevel nestedwithin
a randomeffectat thefirmlevel. Specifically,
1oAt this ourterminology. let
pointit is usefulto reiterate Yij,be thelatentdependent variableforem-
"Employee" refersto an individual subjectin the experi-
ment,while"firm"refersto a fixedgroupingof fourem-
ployees. Thus, "employee-level"data consist of four
separateeffortlevels per roundper firm,one choice per " For firm-level and employee-level each
regressions,
employee."Firm-level" dataconsistof a singleobservation for
firmis treatedas a separatecluster.This is appropriate
perroundperfirm, theminimum effortchosenby thefour theemployee-level regressionssinceobservationsfromem-
employeesof the firm.Wheneverwe referto "effort" or ployeesin thesame firmare notindependent.
"averageeffort,"we arereferring
to employee-level data.If 12
Underlying thetradeoff betweenType 1 and Type 2
we referto "minimum or"averageminimum
effort" effort," errorsis a tradeoffbetweenefficiency and thestrength of
we meanfirm-level data. assumptions aboutthedistribution of errors.

ployeej in firmi in roundt,letXij,be thevector cultyofturning arounda "failing"firm,

mostof
of independent variablesforemployee j in firm thesefirmshave multipleemployeeschoosing
i in round let
t, ti be a firm specificerrorterm, zero. Of the45 (out of 58) firmswitha mini-
letvjbe an employeespecificerrorterm,andlet mumeffort of zero in round10, 43 have more
eij,be an i.i.d.errortermforemployee j in firm thanone employeechoosingzero and 26 have
in round t. Assume that - . all fouremployeeschoosingzero.
i -
N(0, vG), vj
N(O, vi), and thateijt N(O, t.i 1). Thenyijtis
givenby thefollowingequationwherea is a B. Overcoming
Coordination
Failure
scalarand p is a vectorof parameters:
Having trappedmost of the experimental
= +
(3) yi, a + pX,j + gi+ v ij,t. firmsin the worstpossibleoutcome,we now
turnto thetaskofovercoming thiscoordination
The dependentvariableis derivedin thestan- failure.Figure1 showsaverageminimum effort
dardway foran orderedprobitgiventhelatent levels in rounds10-20 as a functionof the
variableand cutoffs betweencategories.Maxi- bonusrate.An equivalentfigureforemployee-
mumlikelihoodestimation is used to fitvalues level data can be foundin SectionB.1 of the
forthecutoffs, a, f, vG,and v,. on-lineAppendix.
Throughout this paper,all testsof signifi- Focusingon the cells wherethebonusrate
cance forindividualparameters are two-tailed has increased,two centralfeaturesof thedata
z-tests.All testsof joint significance use log can be observed.First,an increasein thebonus
likelihoodratiotests.The cutoffsand random rateleads to an increasein theminimum effort.
effectsparameters arenotreported in anyofour This effectis visibleforall threebonus rate
tables since theseestimatesare of littleeco- increasesused in rounds11-20. It is nota pure
nomicinterest. In all cases, theseomittedpa- restart effectsinceforcell 6, thecontroltreat-
rameter estimatesare statisticallysignificant. mentwherethebonusrateremainsat B = 6,
thereis no analogouseffect.Instead,theaver-
age minimum effort
in cell 6 is flatthroughout
A. Precondition Treatments
forExperimental rounds11-20 and generallyequals thelevel in
round10.13These increasesare probablynot
The goal forrounds1-10,playedwithB = 6, transient, as behaviorhas largelystabilizedby
was to establisha historyof coordination fail- rounds16-20. Lookingat cells 1-3, thecells
ure.The minimum effortis indeedlow through- wherethebonusratedoes notchangeagainfor
outtheserounds, equalingzerofor71 percent of rounds21-30,theaverageminimum effortover
all observationsand 78 percentof round 10 rounds26-30 is 28.9, virtually identicalto the
observations. Averageminimum effortis 5.71 averageminimum effortof 28.3 forthe same
overrounds1-10 and equals 5.86 in round10, cells in rounds16-20.14
butthedataaremoredynamicoverrounds1-10 Second,theredoes notappeartobe a positive
thantheseaveragesindicate.In round1, many relationship betweenthe magnitude of thebo-
firmshaveintermediate minimum effortsof 10, nus increaseand its long-run impacton mini-
20, or 30 (41 percentof all firms)whilealmost mum efforts.The highestbonus, B = 14,
noneis perfectly coordinated witha minimum actuallygeneratesthelowestminimum efforts
effortof 40 (2 percentof all firms).Overtime, in rounds16-20! Effort levels are roughlythe
a clear bifurcation emergesin the data. By
round10, almostno firmsare leftat theinter-
mediateeffort levels (14 percentof all firms). 13 Thereis a transitoryrestarteffectin the employee-
Whilemostfirmshave slippeddownwardto a level data. Averageeffortin cell 6 increasesfrom9.00 in
round 10 to 16.25 in round 11, but this increaseat the
minimumeffort of zero,enoughshiftup to a
employeelevelis tooweakto generate anymovement at the
minimum effortof 40 (9 percentof all firms) firmlevel.By round15,theaverageefforts havefallenback
thattheoveralleffecton theaverageminimum to theiroriginallevel.
effortis minimal.Most of the upwardmove- 14 As an alternativemeasureof stability,69 percentof
mentobservedin laterroundscomes fromthe observations fromround16-20 of cells 1-5 areNashequi-
libria.The equivalentfigure
forrounds11-15 is 37 percent.
largemajority of groupsthathave a minimum If we pool data fromrounds26-30 of cells 1-3, thepro-
effortof zero in round10. Increasingthediffi- portionof Nash equilibriais 87 percent.

40
30
Efurt
20
Minimum
Avurage
10
0
10 11 12 13 14 15 16 17 18 19 20
Roumd
-
-Bonu= 6 -Bom-= 8 -Bol== 10 -Bonun=14
ROUNDS 11-20
FIGURE 1. COMPARISONOF TREATMENTS,
Note: Firm-level
data.
sameforB = 8 andB = 10 in rounds16-20. If potheses1(a) and 1(c). Hypothesis1(b) is not

anything,performance appearsto be the best supportedbythedata.
withB = 10,giventhatthiscell had thelowest
averageminimum effortpriorto thebonusin- Examiningemployee-level datafromgroups
crease.'5The occurrence of an increaseto the witha minimum effortof 0 in round10, the
bonus rateseems to matterfarmorein over- immediate responseto an increasein thebonus
comingcoordination failurethanthemagnitude rate is modest.Virtuallyall employeesmove
of theincrease.16 awayfromeffort level 0, buttheydon'tneces-
sarilymovefar.Forround11,effort level40 is
REGULARITY 1: (a) Increasingthebonusin themodaloutcome(30 percent), butalmostas
rounds11-20 significantly increasesminimum manyemployeeschooseeffort levels 10 and20
effort levels.No similarincreaseis observedin (24 percentand 22 percent,respectively). A
rounds11-20 ifthebonusremainsat B = 6. (b) bifurcation thenemergesover time.In some
The increasein theminimum effortlevelis not groups the employeeswho have moved to
monotonically related to how large increase highereffortlevels draw theirmorecautious
the
in thebonusrateis. Theseresultsconfirm Hy- partners afterthem,whilein othergroupsthe
laggardswho don'traisetheireffort level fol-
lowing thebonusincreasepullotheremployees
15
The downwardspikeforthefinalroundof B = 10 is back to themselves. By round20, thevastma-
drivenby a smallnumberofindividuals whoforinexplica-
ble reasonsdropfromchoosing40 tochoosing0 inthefinal jority subjects choosingeithereffort
of are level
round. 0 (20 percent) or 40 (53 percent).
16 One possibleexplanation forthepreceding resultis a Whichside of thisbifurcation a firmfinds
ceilingeffect: all firms
ifvirtually coordinated at higheffort itselfon
depends on howmanyofitsemployees
levelswithan increaseto B = 8, therewouldbe littleroom to thebonushike.We
forgreaterbonusesto perform better.This is notthecase. initiallyrespondstrongly
Considerthefirms mostin needof a turnaround, thosethat label an employeeas a "strongleader"if she
had a minimum effortof 0 in round10. Poolingdata with raiseshereffort by at least twolevelsbetween
B = 8 andB = 10 forround20, 8 outof 14 suchfirms had rounds10 and 11 following thebonusincrease.
all fouremployeeschooseeffort level40. Thereis plentyof All 38 groupsthathada minimum effort ofzero
roomforB = 14 to improveperformance overtheselower
bonusrates,butthehigherbonusratedoes worse,as only7
in round 10 followed by a bonus increase for
out of 24 suchfirmshad all fouremployeeschoose effort round11 includedat least one employeewho
level 40 in round20. was a strongleader.Table 3 showstherelation-

TABLE3-EFFECT OFIMMEDIATE
REACTION
TOBONUS rate remainsat B = 6 throughout this time
INCREASE
period,servesas the base. The primary inde-
Numberof strong Numberof Averageminimum
pendentvariablesin theseregressions aredum-
leaders,round11 observations round20
effort, miesforthebonusrates(otherthanB = 6) used
in rounds11-20: B = 8, B = 10, and B = 14.
1 9 15.56
2 15 20.67
To capturehow theeffectof a bonusincreases
3 9 28.89 overtime(without imposinga lineartrend), the
4 5 30.00 dummiesforthe bonuses are interacted with
dummiesforrounds11-15 and rounds16-20.
Specificationswithalternativetimecontrolsare
ship betweenthe numberof strongleadersin includedin SectionB.3 of theon-lineAppen-
thesefirmsand theirlong-run responseto the dix. Even thoughthe sample is balancedbe-
bonus increase.There is a clear relationship tweenClevelandand Barcelona,a dummyfor
betweenthenumberof strongleadersand av- sessionsconductedin Barcelonais includedto
erage effortlevels-the moreemployeeswho absorbsome of thenoise. Finally,we include
respondstrongly to thebonusrateincreasein thefirm'sminimum effortin round10.20This
round11,thehigherthefirm'sminimum effort laggeddependent variableallows us to control
(on average)in round20.17This resultseems forfirms'different startingpointspriorto the
unsurprising untilone realizesthatno similar increasein thebonusrate.This givesus addi-
relationshipexistsbetweentheminimum effort tionalcontroloverthefirmeffectsin thedata.
in round11 and theminimum effort
in round The primary conclusionsto be drawnfrom
2018or betweenthenumberof employeeswho theseregressionsare robustto how we control
increasetheireffort, byjustone or morelevels, forrepeatedmeasuresand whatdata are used.
betweenrounds10 and 11 and the minimum Even in rounds 11-15, all threebonus rates
effort in round20.19Overcoming coordination yield significantlygreatereffort,bothon the
failurerequiresa strongpositiveresponseto the employeeand firmlevels,thanin thecontrols.
bonusincreasefrommultipleemployees. This improvement becomes even larger in
Table 4 showsorderedprobitregression re- rounds16-20. Whichbonus increaseis used
sultsthatbackourclaimsinRegularity 1. These has someimpacton behavior,buttheresponse
establishthat increasingthe bonus rate for is nonmonotonic. In makingthisstatement, we
rounds11-20 significantly increaseseffortlev- focuson rounds16-20 whena bonusincrease
els, but thatthe size of the effectis not an has had enoughtimeto yield its full impact.
increasingfunction of thebonusrateincrease Regardlessof whetherwe examinefirm-level
even aftercontrolling forthedifferent starting data or employee-level data,and regardlessof
pointsof the firmsin round10 and for any how we controlforindividualeffects, thedif-
locationeffects. ferencebetweeneffort levelswithB = 14 and
The data includeobservations fromall six thosewithB = 10 is negativeand statistically
cells forrounds11-20. Cell 6, wherethebonus albeit weakly.21The effortlevels
significant,
withB = 14 arealso lowerthanthosewithB =
8, butthisis onlystatistically when
significant
17 Thisrelationship has moderatestatistical significance:
running a regressionof minimum effort in round20 on the
number ofstrong leaders,therelevant parameter justmisses
significance at the5-percent level. 20
As an alternative, the employee-levelregressions
18 Of these38 firms, the15 firms witha minimum effort coulduse theindividualemployee'seffort in round10. We
level of 0 in round11 have an averageminimum effortin triedthis and foundit yields somewhatworse fits.The
round20 of22.7. The 17 firms witha minimum effortlevel primary qualitativeresultsare notaffected.
of 10 havean averageminimum effortof 19.4.The remain- 21 Redoingtheregressions fromTable 4 withB = 14
ing six firmshave an averageminimum effort of 31.7 in differenced fromB = 10 forrounds16-20, the relevant
round20. parameter is significant
forthe firm-level data at the 10-
19 For all but one of the 38 firms, morethanone em- percentlevelusingclustering (z = 1.77,p = 0.077) and at
ployeeincreaseshis/her effort level in round11. The aver- the 1-percent level usingrandomeffects(z = 3.818,p <
age minimumeffortin round 20 equals 20.0 if two 0.01). For theemployee-level therelevantpa-
regressions,
employeesincreasetheireffort (4 firms), 23.8 if threeem- rameteris significant at the 10-percentlevel usingeither
ployeesincreasetheireffort (16 firms), and 23.5 ifall four clustering(z = 1.86,p = 0.063) or nestedrandomeffects
employeesincreasetheireffort (17 firms). (z = 1.72,p = 0.089).

TABLE4-ORDEREDPROBITREGRESSIONS
ONDATAFROMCELLS1-6, ROUNDS11-20
Data type
Firm-level
data minimum
effort data effort
Employee-level
Controlsfor
individualeffects Clustering Randomeffects Clustering Nestedrandomeffects
Rounds11-15 1.468*** 1.395*** 1.257*** 1.702***
*B = 8 (0.416) (0.376) (0.385) (0.227)
Rounds11-15 1.427*** 1.505*** 1.249*** 1.244***
* B = 10 (0.336) (0.373) (0.227) (0.212)
Rounds11-15 1.470*** 1.575*** 1.266*** 2.157***
* B = 14 (0.311) (0.345) (0.246) (0.213)
Rounds16-20 -0.052 -0.103 -0.404*** -0.751***
(0.041) (0.391) (0.111) (0.151)
Rounds16-20 2.137*** 2.985*** 1.685*** 3.282***
*B = 8 (0.587) (0.419) (0.541) (0.252)
Rounds16-20 2.567*** 3.422*** 2.120*** 3.240***
* B = 10 (0.466) (0.408) (0.444) (0.234)
Rounds16-20 1.796*** 2.360*** 1.270*** 2.938***
* B = 14 (0.346) (0.352) (0.291) (0.219)
Barcelona -0.009 -0.233 -0.064 -0.440"**
(0.261) (0.173) (0.242) (0.109)
Minimumeffort 0.067*** 0.157*** 0.058*** 0.121***
Round 10 (0.016) (0.013) (0.014) (0.008)
Log-likelihood -708.86 -528.37 -2,821.90 -2,073.39
#Observations 580 580 2,320 2,320
* at 10-percent
level.
Significant
** Significant
at 5-percent
level.
at 1-percent
*** Significant level.
themorepowerful randomeffectsspecification The figurealso shows,as a pointofcomparison,

is used to controlforindividualeffects.22
Sig- theaverageminimum forrounds1-10 of
effort
nificantdifferences are neverfoundbetween these three cells. An equivalentfigurefor
B = 8 and B = 10.23The econometric results employee-level data can be foundin Section
supportRegularity1-subjects respondposi- B.1 of theon-lineAppendix.
tivelyto an increaseinthebonusrate,butlarger a cutin thebonusrate
As Figure2 illustrates,
increasesdo notyieldlargerresponses. does notlead to a collapseback to the initial
effortlevel.A cutto B = 10 actuallyyieldsan
C. ShockTherapy increasein averageminimumefforts! Cutting
thebonusratetoB = 6 causestheaverageeffort
Figure2 shows averageminimumeffortin to fallsharply,butnotback to its originallev-
rounds20-30 forcells 1,4, and5, thecellsthat els.24Followingthebonusratereduction, firms
had a bonusrateof B = 14 forrounds11-20. tendeithernotto changeat all or to changea
lot. Suppose we compareminimumefforts in
round20 withthosein round29.25Of the 19
firmsthatsee a decreasein thebonusratefor
22
Rerunning the regressions withB = 14 differenced
fromB = 8 forrounds16-20, therelevant is not rounds21-30, tenhavethesameeffort levelin
parameter
significantat the10-percent levelusingclustering foreither
thefirm-level data(z = 0.57,p = 0.57) or employee-level
data(z = 0.73,p = 0.46). Withrandomeffects, therelevant 24 Extending play formoreroundswouldprobablynot
parameter becomessignificant at the10-percentleveleither reversethisresult,as playhas largelystabilized.Forrounds
usingfirm-level data (z = 1.93,p = 0.054) or employee- 26-30 of cell 6, 73 percentof all observations are Nash
level data (z = 1.80,p = 0.071). including
equilibria, 67 percentofobservations witha min-
23 Differencing B = 10 fromB = 8 forrounds16-20, imumeffortgreaterthanzero. The equivalentfiguresfor
even withthemorepowerfulrandomeffectsspecifications rounds21-25 are 40 percentand 40 percent.
therelevantparameter at the 10-percent
is not significant 25 Due to a computer we losttheround-30datafor
error,
level eitherusingfirm-level data (z = 1.17,p = 0.24) or 6 ofthe29 groupsconsidered here.We use round29 rather
employee-level data (z = 0.22,p = 0.83). thanround30 to avoid havingto dropthese6 groups.

40-
30-
Effort
20
Minimum
Averae
10
0
20 21 22 23 24 25 26 27 28 29 30
Round
-Bonus-6 -Bonus-O -Bonus-14 -PooledData,RoundsI1-10(B - 6)
FIGURE 2. COMPARISON OF TREATMENTS, ROUNDS 21-30, AND CONTROL, ROUNDS 1-10
Note: Firm-level
data.
round29 as in round20.26 Amongthe nine effortlevel in round21 whenthe bonus rate

firmsthatsee changes,six see changesof at fallsto B = 6. Bothremaincoordinated at the
leasttwoeffort levels.The relatively
good per- payoff-dominant equilibrium(all employees
formance offirms thathavetheirbonusreduced choose effort level 40) throughout rounds21-
backtoB = 6 is almostentirely duetofirms that 30. In the remainingsix firms,at least one
didn'trespondto thechange-therewerefour employeereduceshis effort level in round21
firmsin cell 5 thatincreasedtheirminimum below thefirm'sminimum effortin round20.
effortbetweenrounds10 and 20 but did not Four of thesix firmsconvergeto lowermini-
changetheirminimum effortin responseto the mumeffort levels,whiletheothertwoeventu-
bonus cut forrounds21-30. Generally,effort ally returnto the minimumeffortlevel they
levels show historydependencein only one achievedin round20. In the fourfirmsthat
direction-itis easy to move firmsto higher don'trecover,at leastone employee(and usu-
effortlevels and harderto move themback to allymore)whodidn'treducehis effort levelin
lowereffort levels. round21 respondsto thereduction in minimum
effortin round21 by cuttinghis own effort in
REGULARITY 2: AfterhavingB = 14 for round22. In the two firmsthatrecover,the
rounds11-20, reducingthebonusdownto ei- employeeswho do notcuttheireffort in round
therB = 6 or B = 10 does not reducethe 21 maintaintheirhigh effortin subsequent
minimum effort back to its originallevel. The rounds.Thus,a negativeresponseto thebonus
data supportHypothesis 2. cut involvesa chain reaction-one or more
employeesinitially cuttingtheirefforts triggers
To understand firms'differing responsesto a effortreductionsamongtheotheremployees.If
bonus rate cut, consideremployee-leveldata thereis a cohortofemployeeswhoholdsteady,
fromthetenfirmsin cell 5, themostextreme theemployeeswho originally reactnegatively
treatment. Eightof thesetenfirmshave mini- to the bonus cut eventuallyrecoverto their
mumeffort levelsgreater thanzeroin round20. originaleffortlevels.
Fortwoofthesefirms, no employeechangeshis The regressionsshownin Table 5 provide
statisticalsupportfor Regularity2. Data are
takenfromthe threecells, cells 1, 4, and 5,
26
As a pointof comparison, wherethebonusrateincreasesto B = 14 for
amongthe 10 firmsthat
have B = 14 forrounds11-30, 9 have no changein the rounds11-20. Data fromrounds6-10, thelast
minimum effortfromround20 to round29. fiveroundswithB = 6 preceding theincreasein

TABLE 5-ORDERED PROBITREGRESSIONSON DATA FROMCELLS 1, 4, AND 5, ROUNDS6-10 AND 21-30
Data type dataminimum

Firm-level effort dataeffort
Employee-level
Controlsfor
individualeffects Clustering Randomeffect Clustering Nestedrandomeffects
Rounds21-25 1.503*** 3.491*** 1.232*** 1.781***
*B = 6 (0.428) (0.357) (0.315) (0.120)
Rounds21-25 0.550 1.824*** 0.381 0.458***
* B = 10 (0.511) (0.083) (0.466) (0.142)
Rounds21-25 0.310 0.777** 0.154 0.902***
* B = 14 (0.509) (0.329) (0.443) (0.150)
Rounds26-30 1.534*** 3.750*** 0.866** 1.133***
*B = 6 (0.442) (0.372) (0.373) (0.120)
Rounds26-30 1.250** 3.557*** 1.245** 1.817***
* B = 10 (0.635) (0.727) (0.622) (0.163)
Rounds26-30 0.038 -0.083 0.077 0.780***
* B = 14 (0.559) (0.328) (0.542) (0.155)
Barcelona -0.454 -0.443 -0.359 0.046
(0.376) (0.270) (0.313) (0.102)
Minimumeffort 0.071*** 0.011 0.057** 0.007
Round5 (0.025) (0.010) (0.023) (0.005)
Log-likelihood -424.68 -265.36 -1,969.76 -1,510.12
#Observations 429 429 1,716 1,716
* Significant
at 10-percent
level.
at 5-percent
** Significant level.
at 1-percent
thebonusrate,and rounds21-30 are included. (rounds26-30)*(B = 6). Lookingat eitherfirm-

The data fromrounds6-10 serveas thebase. leveldataor employee-level data,andregardless
The primary independent variablesin thesere- ofhowwe control forrepeated these
observations,
gressionsare dummiesfor the bonus rates parameterestimatesare alwaysstatistically
signif-
used in rounds21-30: B = 6, B = 10,andB = icantat the5-percent level and,withonlyone
14. To capturehow the impactof decreasing exception,at the1-percentlevel.Cuttingthebo-
thebonusratedevelopsovertime,thedummies nusratefrom B = 14backtoB = 6 leadstoeffort
forthe bonuses are interacted withdummies abovelevelspriorto thebonusin-
significantly
forrounds21-25 and rounds26-30. A key crease.Thisisn'ttosaythatcuttingthebonusrate
featureoftheseregressionsis thatthevariables doesn'thaveanynegative
so sharply impact,as a
forB = 10 and B = 14 are differenced from cuttoB = 10 yieldssignificantly
highereffortsin
B = 6 fortheequivalenttimeperiod.For ex- rounds26-30 thana cut to B = 6. The latter
ample, the parameterestimatefor (rounds conclusionholdsforeitherfirm-or employee-
21-25)*(B = 6) capturesthedifferencebetween leveldataandis notsensitive to howwe control
behaviorwithB = 6 in rounds21-25 (cell forrepeated observations.
5) and thebase, whiletheparameter estimate
for(rounds21-25)*(B = 10) capturesthedif- D. The Cost ofDelay
ferencebetweenbehaviorwith B = 10 in
rounds21-25 (cell 4) andbehaviorwithB = 6 We have establishedthatan increasein the
in rounds21-25 (cell 5). Once again,we in- bonusratecan overcomea history of coordina-
clude a dummyforthelocationof thesession. tionfailure,butthehistorydependenceunder-
To controlfor differences in firms'starting lyingRegularity227suggeststhatthetimingof
points,we includethe minimum
firm's effortin
round5.
The regressionsshownin Table 5 support the 27 Subjectsin rounds21-30 of cell 5 behavedifferently
conclusionsreported as Regularity2. The key fromsubjectsinrounds1-10. BothsetsofsubjectsfaceB =
parameters are (rounds21-25)*(B = 6) and 6, buttheformer have previousexperiencewithB = 14.

40
30
Effort
20
(Minimum)
Average
10
0
0 1 2 3 4 5 6 7 8 9 10
RoundsFollowing
Increase
-EarlyIncrease LateIncrease
(Firm) (Finnrm) Earlyincrease
(Employee) -LateIncrease
(Employee)
3. EFFECT
FIGURE OFTIMING,
CHANGE B = 6 TOB = 14
FROM
an increasemaybe important. Thisleadsto our untilround21, employeeswho at firstmoveto

finalquestion:Given thepresenceof hystere- highereffort levelstendto retreatbackto lower
sis, is it harderto turnarounda firmwitha effort levels,dampening a continuedincreasein
longerhistoryof coordination failure?Figure minimum effort levels.28It appearsthatan ex-
3 comparesaverageminimum effortwhenthe tendedhistory ofbadoutcomes makesemployees
bonus is raised to B = 14 afterten rounds moreproneto pessimism whenthingsdon'tgo
(cell 1, 4, and 5) versus20 rounds(cell 6) of well.Witha lateincreaseofthebonusrate,there
play with B = 6. The x-axis displays the stillexistsa cohort ofemployees whotrytomove
finalroundpriorto, and the firstten rounds to highereffort levels.Whenothers don'trapidly
following, thebonusincrease,rounds10-20 for followtheirlead,however, theygiveup and cut
cells 1, 4, and 5 and rounds20-30 forcell 6. theirowneffort levels.
Average minimumeffortsare initiallyunaf-
fectedby how much timepasses beforethe REGULARITY 3: Delayingtheincreasefrom
bonus increase, but a modest difference B = 6 to B = 14 by ten roundshas a small
emergesforrounds6-10 followingthebonus on efficiency.
negativeeffect Thisprovidessup-
increase-effortlevels are lowerwhenthein- port,albeitweak,
forHypothesis 3.
creasehas been delayed.
To helpunderstand theforcesunderlying this The regressionsreported in Table 6 examine
effect,Figure3 also graphsthe averageeffort whether themodestdifference in effort
levelsob-
acrossallemployees, broken downbywhether the servedwithan earlyversusa lateincreasein the
bonusrateincreaseoccursafter10 or 20 rounds. bonus rate is statistically
significant.Data are
As with the firm-level data, the employee- takenfromrounds11-20ofcells 1,4, and5, the
level data are notaffected by thetimingof the threecellswithearlyincreasestoB = 14,as well
bonushikeforthefirst fewperiods.Instead,the as rounds21-30 of cell 6, thecell witha late
negative effectofdelayis drivenbydifferencesin increasetoB = 14.Datafromthefirst fiverounds
the willingness of employeeswho initiallyre- followinganearlybonusrateincreaseserveas the
spondpositively to thebonushiketo remainat
thesehigheffort levels.Whentheswitchto B =
28
14 occursin round11, employeeswho initially Note thatthe averageeffortsforthe two treatments
movetohigher effortlevelstendtostaythereand divergebeforetheaverageminimum efforts.
This indicates
thattheproblemis nota failureby employeeswhochoose
eventually pulllower-effortemployees up totheir lowereffortlevelsto respondto theircompatriots'
choices
level. In contrast,whentheincreaseis delayed of higherefforts.

TABLE 6--ORDERED PROBITREGRESSIONSON CELLS 1, 4, AND 5, ROUNDS 11-20, AND CELL 6, ROUNDS21-30
Data type data minimum

Firm-level effort dataeffort
Employee-level
Controlsforindividualeffects Clustering Randomeffect Clustering Nestedrandomeffects
Rounds6-10 0.326** 0.741*** -0.169 0.028
Followingincrease (0.129) (0.154) (0.293) (0.079)
Rounds1-5 -0.197 -0.026 0.002 -0.073
Followinglate increase (0.365) (0.232) (0.134) (0.135)
Rounds6-10 -0.465 -0.606** -0.478 -0.746***
Followinglate increase (0.442) (0.245) (0.427) (0.143)
Barcelona 0.029 -0.386** 0.051 -0.278***
(0.320) (0.169) (0.299) (0.104)
Minimumeffort 0.049*** 0.164*** 0.041*** 0.071***
Last B = 6 round (0.015) (0.016) (0.013) (0.008)
Log-likelihood -563.04 -390.89 -2,189.30 - 1,554.54
#Observations 389 389 1,556 1,556
* Significant
at 10-percent
level.
at 5-percent
** Significant level.
at 1-percent
base. The primary independent variablesare a therea unified modelthatcan explainthesereg-

dummy for rounds 6-10 followingthebonusrate Giventhestrong
ularities? dynamics andhistory
increaseand interactions betweendummiesfor dependencein the data,staticmodelssuch as
five-roundblocksfollowingthe bonusratein- quantileresponseequilibrium (RichardM. McK-
crease,and a dummyfora late increase.The elveyandThomasR. Palfrey, 1995)areunlikely
regressionsagainincludea dummyforwhether candidates to characterizethedata.We therefore
thesessiontookplacein Barcelonaanda control focusonmodelsinwhichatleastsomeplayers are
forthefirms'differing starting points,thefirm's boundedly rationalandonlygradually learnfrom
minimum effort in the last roundpriorto the theirexperiences howbestto respond in a game.
bonusrateincreaseto B = 14. Because learningmodelsexplicitly incorporate
The resultsreported in Table 6 providelim- dynamics andhistory dependence, it is plausible
itedsupport forRegularity 3. Thekeyparameter they can track ourdata.
estimate,thecoefficient fortheinteraction be- We explore this conjecture using the
tweenthe dummyfora late increaseand the experience-weighted attraction (EWA) learn-
dummyforrounds6-10 followingthe bonus ing model introducedby Camerer and Ho
rateincrease,is consistentlynegativebutsignif- (1999). Thereexistmanylearningmodels in
icant only when the more powerfulrandom theliterature, and it remainsunclearwhich(if
effectsspecifications are used to controlfor any) of thesemodelshas thebestexplanatory
repeatedobservations. This is trueforboththe powerforexperimental data. EWA is a good
firm-leveldata and the employee-level data.29 place to start,however,because it has the
These resultsare consistentwith our earlier usefulpropertyof nestingboth belief-based
observationthatdelayingthe bonus rate in- learningmodels and reinforcement learning
creasehas onlya modesteffect. models.We focuson itsabilityto explainone
of the mostpuzzlingregularitiesin the data,
E. LearningModels thenonmonotonic effectof increasingthebo-
nus rateforrounds11-20.
Our dataanalysisrevealsa numberof strong Beforeintroducing thedetailsof EWA, con-
regularities. This raises an obvious question: Is sider two features of thedatathatplaya central
role in overcomingcoordinationfailureand
musttherefore be capturedby themodel.The
29The coefficientestimates forrounds16-20 are statis- firsthas been highlighted in SectionIVB, the
forthefirm-level
ticallysignificant databutnottheemployee- leaders."Stronglead-
need formultiple "strong
leveldata.Thisreflectstheadjustment processwithan early
individuals
increasein thebonusrate,as low-effort arepulled ers succeedin leadingtheirfirmsto betterout-
to
up higher effort
levels. comesbecauseofa secondsubtlefeature ofthe

data--manylaggardswho don't initiallyim- theticalpayoffsare determined by a parameter

prove theireffortfollowinga bonus rate in- fitted fromthedata.It is thisinclusionof both
crease are responsivefollowers.Once they realizedand hypothetical payoffsthatallows
observeothers'increasedeffort levels,theyre- theEWA modelto nestbothreinforcement and
spondwithstrongeffort increasesoftheirown. belief-basedmodels of learning.30To give
Considerthetoughestcases, firmsin cells 1-5 EWA a betterchance to trackthe data, we
thathad a minimumeffortof 0 in round10. modifyit slightly to capturetheobviousrestart
Althoughaverageeffort increasesonlyslightly effectsin thedatabetweenten-period blocks.31
betweenrounds11 and 12 forthesefirms, rising At theend of each ten-round block theattrac-
from22.4 to 23.2, employeeswho choose an tions that governchoices in the subsequent
effortof 0 in round11 sharplyincreasetheir blockare resetequal to a weightedaverageof
effort withan averageof 14.2 in round12. This the initialattractionsand theattractions at the
positivemovement cannotbe attributed solely end of theten-period block.
to employeeswhobestrespondto theprevious To generatepredictions forthe model,we
round'soutcome.If we lookonlyat employees firstcalibratethemodelby fitting it to thefirst
who did notuniquelydetermine theminimum tenroundsofdatafromcells 1-5 andthefirst 20
effort fortheirgroup(and hencecan'tbe play- roundsofdatafromcell 6. Thisextradatafrom
ing a best responseto round11 outcomesby cell 6 areincludedso theresetparameter can be
increasing theireffort),employeeswho choose estimated.We do not use additionalrounds
an effortof 0 in round11 choose an average fromtheothercells-the goal is to predictbe-
effortof 11.3 in round12. Regressionto the haviorfollowingan increasein thebonusrate
meanalso cannotexplaintheincreasedeffort of based on behaviorpriorto the bonusrate in-
laggards.Restricting thesampleto subjectswho crease.All theparameters forthefullmodelare
chose an effortof 0 in rounds10 and 11- fitusing standardmaximumlikelihoodtech-
subjectswho have persistently chosenthelow- niques, includingthe parameterthatgoverns
est possible effortlevel-average effortin how muchattractions are resetfollowingthe
round12 increasesto 13.53. As will be seen firstten rounds.The resetparameter is likely
below,whileEWA can be modified triviallyto underestimated forsessionswitha bonusrate
capturethepresenceofstrong leaders,itis more increase,as therestartin thesesessionsis far
difficultto incorporateresponsivefollowers. moredramatic thanin thecontrols.Usingthese
This shortcoming plays a centralrole in the parameterestimates,we then simulatethe
basic model's inabilityto trackthe data. We modelforthefirst 20 roundsoftheexperiment.
concludethis subsectionby illustrating more For all simulationsthebonusrateequals 6 for
radicalrevisionsto the modelthatallow it to rounds1-10. For rounds11-20, we run 1,000
capturethe presenceof responsivefollowers simulations each withbonusratesof 6, 8, 10,
and hencebettertrackthedata. and 14. Figure 4 reportsthe resultsof this
We now turnto an informaldescription of simulation exercise,comparing theaverageef-
CamererandHo's basicEWA model.Technical fortin theexperimental data withtheaverage
detailsare providedin SectionC of theon-line
Appendix.Each playerstartsout withweights 30
("attractions"in Camererand Ho's nomencla- The nestingof belief-basedmodels comes with a
caveat.EWA does notdirectly includepayoff maximization
ture)foreach of his strategies.The probability as a belief-basedmodel (e.g., fictitious
ofa strategy play) does. This
beingplayedis an increasing func- becomesimportant if thepayofffunction changesbetween
tionof itsweight.Attheendof eachround,the roundsas in our experiments. Even withoutadjustingbe-
weightforeach of thestrategies is updated.As liefs,a belief-based
modelwillinstantaneously respondto a
in a reinforcementlearning model,thisupdating payoff changeas thepayoffmaximization problemhasbeen
altered.Unless we forceattractions to change when the
in
depends part on the payoffreceivedby the payoffs change,thebasic EWA modelwillrespondonlyto
realized strategy-higherpayoffslead to a changingpayoffswitha delay.Intuitively, EWA responds
greater frequencyofplayin future rounds.Like onlytopayoffs thathappenedorcouldhavehappenedinthe
belief-basedmodels,unusedstrategies also get past.
31 These are presenteven in cells wherethebonusrate
theirweightsupdatedbasedon whattheywould doesn't change. For example,the average effortby an
have earnedif theyhad been employed.The employeejumpsfrom9.00 inround10 ofcell 6 to 16.25in
relativeweightsof realizedpayoffsand hypo- round11,even thoughB = 6 in bothrounds.

Data
Experimental
40
30
Effort
20
Average
S10
0
10 11 12 13 14 15 16 17 18 19 20
Round
=6
Bonus =8
Bonus = 10 -Bos=14:
.,Bonus
Data,BasicEWA
Simulation
20
15
Effort
10
Average
5-
0 10 11 12 13 14 15 16 17 18 19 20
Round
Bonus
=6 -Bonus=8 = 10
Bonus -Bonus=14 1
Data,EWAwith
Simulation Strategic
Endogenous Detectors
andChange
Teacheas
20
15
Effort
10
Average
0 10 11 12 13 14 15 16 17 18 19 20
Bonus=6 -Bonus
=8
Round
)oMus 10 -14
P-Bmw
DATA
FIGURE4. COMPARISONOF EWA SIMULATIONSWITHEXPERIMENTAL

effort in thesimulations forround10-20. Note by increasingthe resetparameter. Generating

thatthisis employee-level datarather thanfirm- responsivefollowersis a fargreaterproblem.
level data-the simulations generallydo a bet- As we did withthedata,considerfirmswitha
terjoboftracking theemployee-level data.Also minimum effort of zero in round10 and focus
notethattheverticalscales are different on the onthebehaviorofemployeesinthesefirms who
twopanelsof thefigure. stillchoosezero in round11. Takingan appro-
To pointouttheobvious,thesimulations do priately weightedsamplefromthesimulations,
a poorjob of replicating theexperimental data. thesesimulatedemployeeshave an averageef-
The averageeffortforround10 differslittle fortofonly2.71 in round12. Evenifwe double
betweenthe simulationsand the experimental theresetparameter to makesimulatedplayfor
data,and bothshowan increasein effort levels round11 morecloselyapproximate theexperi-
forround11, albeitmuchsmallerin thesimu- mentaldata, the average effortof simulated
lationsthantheexperimental data.It is in round subjectswhochoseeffort level0 in round11 is
12 thatthesimulations beginto differ dramati- only 6.58 in round 12. Recall, the equivalent
callyfromtheexperimental data.In theexper- figure for the real data is 14.2. Unliketheex-
imentaldata,averageeffort levels continueto perimental data,laggardsinthesimulation tend
increasegradually overtime.In thesimulations, to remainlaggards,draggingthe restof their
round12 is a disasteras mostof thegains of firmback to a low effort level.
round11 areimmediately lost.Effort levelsfall Two features ofthemodelmakeitlikelythat
steadily over time, eventuallyreachingeven a laggardwillremaina laggard.First,a subject
lowerlevels thanin round10. In the simula- is likelyto be a laggardifhis experiencein the
tions,bonusrateincreasesfail to overcomea firsttenroundsstrongly suggested thatchoosing
history of coordination failure. thelowestavailableeffort level was a payoff-
NarrowtechnicalreasonsthatEWA might maximizing strategy.Theseexperiences haven't
fail to tracktheexperimental data can be dis- vanishedby round12, makingit likelythata
missed.For example,as notedabove,thefitted low effort level will stillbe selected.Second,
value of the resetparameteris probablytoo because EWA nestsreinforcement learning,it
small.We therefore ran simulations wherethe inherits someofreinforcement learning'sprop-
resetparameter was doubled.This producesa erties.Specifically, thereis strongcorrelationin
much largerincreasein effortfor round 11, players' choices across roundsregardlessof
similarin magnitudeto thatobservedin the whatotherschoose because the updatingrule
data,but doesn'tpreventthe downwardspiral putsextraweighton attractions forthestrategy
thatfollows.More generally, it can be argued just played.This makes it likelythatan em-
fairlythatwe haveexaminedthemodelforonly ployeewhoselectseffort levelzeroin round11
one setofparameters andthatperhapsthefault will also choose it in round12. Both of these
lies withour fitting exercise.To answerthis pointsindicatethatthemodelis a victimof its
critiquewe haverunrobustness checksusinga ownhistory dependence. Thiscontrasts withthe
varietyof different parameter values. The in- experimental datawherelaggardseagerlyaban-
abilityto overcomecoordination failureappears don a historyof failure-if somebodyelse
to be a generalfeature of themodelrather than showsthemtheway.
a function of the specificparameters we have The preceding suggeststhatdeepermodifica-
selected. tionsto EWA are neededthantweakinga pa-
To betterunderstand whytheEWA modelis rametervalue. In additionalcalibrationand
failing,reconsider thetwofeatures in theexper- simulation exercises,we have made threesub-
imentaldata thatwe identified as playinga stantivemodifications as well as doublingthe
centralrolein overcoming coordination failure: resetparameter. The firsttwo are drawnfrom
multiplestrong leaders to the bonus rate in- the literature on learningin games: strategic
crease and responsivefollowers.The firstis teaching (Camerer et al., 2002)32and change
replicatedto some extentby the calibrated sensitivity(Camereret al., 2002). Strategic
model,as effort immediately jumps following
thebonusratehikedue to thetrivialmodifica-
tionof includinga restart. Moreover,thepro- 32
For relatedmodels see Dale O. Stahl (1999) and
portion ofstrongleaderscan easilybe increased Cooperand JohnH. Kagel (2004).

teachingadds individualswho understand that model.35The large changein effortin round

othersare learninghow to play thegame and 11 induces a substantialfractionof the lag-
thereforetakeactionsdesignedto influence oth- gardsto switchto strategicteachersin round
ers' learning(such as choosinga higheffort 12. These playersthenbecometheresponsive
levelin an attempt to lead othersoutof coordi- followersthathave been missingin ourother
nationfailure).Withchangesensitivity, players simulationexercises: the average effortin
putless weighton laggedattractions whenother round12 of playerswho chose effortlevel 0
subjects' actions are rapidlychanging.Intu- in round11 is 11.4, close to the 14.2 forthe
itively,past experiencesshouldnotbe consid- actualdata.On thedownside,itmustbe noted
eredas good a guideforcurrent actionswhen thatthe simulationsstillfail to trackthe up-
thesituationis highlyfluid.Changesensitivity wardpathof minimumeffortafterround11.
makesplayersmorelikelyto changetheirbe- The simulationsalso indicate a monotonic
haviorfollowinga changein others'actions. responseto thesize ofthebonusrateincrease,
The thirdmodification, endogenousgrowthof albeit likelytoo small to be detectable,con-
strategicteaching, is more ad hoc. It is well traryto Regularity1. Finally,thisis an ad hoc
establishedwithintheliterature on learningin modeldesignedto trackdata fromthisexper-
games thatstrategicempathy, reasoningfrom iment.We know neitherthat the cognitive
the otherplayers'pointof view, growswith processesunderlying subjects'choicesresem-
experience.33 We therefore allow EWA learn- ble thoseassumedby the model norwhether
ers to become strategicteacherswithexperi- thismodel's relativelygood performance will
ence. Critically,theprobability of a switchis generalize to othersettings.The results are
an increasingfunctionof the change in oth- suggestivebut mustbe takenwitha grainof
ers' actions.Intuitively,imaginean unsophis- salt.
ticatedsubjectwho observesa dramaticshift To summarize,anymodelthatsuccessfully
in others'effortlevels. This subjectmay be tracksthe experimental data will need to in-
promptedto wonder why such a dramatic corporateresponsive followers as well as
change has occurred.Once a subjectmoves strongleadersin a bonusrateincrease.While
into this realm of strategicempathy,it is a we have made progressin identifying a class
short step to becoming a strategicteacher of modelthatmightbe able to trackthedata,
oneself.By allowingstrategicteachingto be it remainsan open question whetherthese
sparkedby others'strategicteaching,we pro- models bear any relationshipto the actual
vide the model witha mechanismby which cognitiveprocessesof the experimental sub-
laggardsmay be made responsive. jects. In futureresearch,we plan to use the
The bottompanel of Figure4 displaysthe teamplaytechniquedevelopedin Cooperand
results of simulationsbased on the EWA JohnKagel (2005) to getinsidetheblack box
modelwiththesethreemodifications.34 While of subjects' thoughtprocessesand begin an-
this still doesn't track the data, it at least sweringthesequestions.
predictsthataverageeffortwill increasefol-
lowing an increase in the bonus rate. This
improvement is due to thethirdmodification,
endogenousgrowthof strategicteaching,as
simulationsof a model lacking this feature 35 Addingstrategic teachersleadsto morestrongleaders
differlittle fromthose of the basic EWA (e.g., a largerjump in averageeffortforround11) but
doesn'tsolve theproblemof insufficiently responsivefol-
lowers.Since strategic teacherstendnotto be laggards,the
behaviourof laggardsisn'tchangeddirectly by theirinclu-
sion. Change sensitivity also fails to generateresponsive
followers. Its inclusionputsmoreweight(relatively) on the
33 See Camereret al. (2002) and Cooper and Kagel roundthatjust occurred.This leads to fasterchangesin
(2003 and 2004). behavioriftheplayerin questionhasjustchangedhis own
34 Mostparameterswerefitfromthesamedataas above actionor thechangingbehaviorof othershas changedhis
using standardmaximumlikelihoodtechniques.The one bestresponse.Forlaggardsfollowing a bonusrateincrease,
exceptionis thegrowthrateofstrategic Due to the
teachers. neitherof these conditionsgenerallyholds-a laggard's
computationalcomplexityinvolved, this was chosen bestresponsechangesonlyin theunlikelyeventthatthere
through a roughvisualcalibration. are no otherlaggardsin his firm.

V. FinalRemarks thefirm manager forrounds11-30.In someofthe

experimental treatments, the subject-manager
Coordination failureis a seriousproblemthat is allowedto sendmessagestohisemployeesas
besetsmanysortsof organization. While one well as selectinga bonusrate.We findthatone
mustalwaysexercisecautionin translating ex- ofthemostprofitable communication strategies
perimental resultsto fieldsettings, our experi- fora manageris to ask all of his employeesto
ments suggest that organizationscan use select the highestpossible effortlevel while
financialincentivesto overcomea historyof pointing outthemutualbenefits ofsimultaneous
coordination failure.Giventhatsmallincreases changesto highereffort levels.In otherwords,
in incentivesare just as effective as large in- successfulmanagersact as a coordinating de-
creases,and given thatincentivesneed to be vice fortheiremployees.37
increasedonlyon a temporary basis, it seems Focusingon theuse offinancial incentives as
that successfulcoordinationcan be accom- a coordination device forchangeallows us to
plishedon thecheap. betterunderstand how an effectiveincentive
In understanding why an incentive increase is scheme ought to be devised.First,anyeffective
effective,understanding thenatureof thecoor- schemeneedsto be globalin nature.If thegoal
dinationproblemis essential.We don't think is to getall agents(or at leastmanyof them)to
thatemployeesin firmsexperiencing coordina- changebehaviorsimultaneously, a piecemeal
tionfailureareunabletoreadthepayoff tableor approachis unlikelyto generatethe needed
failto realizethateveryonecouldbe betteroff fraction of strongresponses.This matcheswell
if all choseeffort level40. The trick,giventhe withtheconclusionsof theempiricalliterature
riskinessof unilateral increasesin effort, is fig- on organizational change.Second,thelaunchof
uringout how and when to get everyoneto an effective schemeneedsto be highlypublic.
changetheirbehaviortogether. If one thinksof Schelling'sclassic exampleon focal points-
theturnaround game as a single30-round game thatindividuals wantingto gettogether in New
ratherthana sequenceof 30 games,thisis an YorkCitywouldnaturally coordinate on Grand
issue of equilibrium selection.The bonusrate CentralTerminalas a meetingplace-works
increasethenservesas a focalpointin thesense because everyone(at the time) would have
of Thomas C. Schelling(1960), triggering a known where Grand CentralTerminalwas.
coordinated changeto highereffort levels.3N Without commonknowledgeofitsexistence, an
Because financial incentives matter primarily incentive scheme is to
unlikely generate the
(in thisenvironment) as a coordinating device, coordinated changeneededto overcomecoor-
it seemslikelythatothercoordination devices dinationfailure.
mightalso be quite effectivein overcoming Many economistsmay be surprisedby the
coordination failure.For example,Brandtsand lack of sensitivity to financial
incentives in our
Cooper(2005) studytheturnaround gamewith data.This is nota resultthatgeneralizesto all
a fifth experimental subjectplayingtheroleof environments, as behaviortypically is sensitive
to themagnitude of incentives(e.g., Raymond
Battalioetal.,2001). Foroursetting, werewe to
36 In VinceCrawford's (1991) discussionofVan Huyck
et al.'s (1991) workon mediangames,he notesthatany
changein treatment tendsto lead to coordinationat higher
effort levels.Crawford informally refersto a "bell-ringing
effect," wherethechangesin treatments serveas a coordi- 37 The bonustreatment of Knez andCamerer(1994), as
natingdevicesimilarto thechangesin bonusratesforour reported inCamerer(2003),providesanother exampleofan
experiments. Whilethisresultis froma substantially dif- effectivecoordination device. Subjectsplay a six-player
ferentenvironment and uses different manipulations from minimum gameforfiverounds.Play reliablyconvergesto
thosestudiedhere,it suggeststhatthevalueofbonushikes thelowestpossibleeffort in thesegames.A bonusis then
as a triggerfor coordinationis partof a more general announcedif subjectsall choosethehighestpossibleeffort
empiricalregularity. theseresultsdon't nec-
Interestingly, levelin a sixthandfinalround.Virtually all subjectsswitch
essarilyextendto theharsher environmentoftheweak-link to thehighest effort
levelevenifthebonusis quitesmall.It
game. Even witha history of successfulcoordination in a seemsunlikely thatthechangeinfinancial incentives causes
closely relatedgame, Van Huycket al. (1990) findthat thisimprovement per se, giventhata smallbonusis ade-
switching to theminimum gamecauses a quickcollapsein quate.Instead,therapidchangeis likelydue to thestrong
effort levels(p. 243). This is consistent
withourfailureto external deviceprovidedbytheexperimenter's
coordinating
findpurerestart effects. announcement. See Weberetal. (2001) fora similar
example.

set incentivessuch thatpositiveeffort were a For each roundof the experiment you will
dominatedstrategy, it is highlylikelythatall receivea flatwageanda bonusthatdependson
positiveeffortwouldcease. Likewise,choosing theminimum number ofhoursspenton Activity
a veryhighlevelofB wouldlikelyyieldperfect A bya member ofyourgroup.Forall roundsof
coordination.Ourresultsindicate, however,that thisexperiment, theflatwage equals 200 pese-
thereare cases wherethemagnitude of incen- tas. The bonus rate, B, may vary between
tives is not of first-orderimportance. In our rounds.The bonusrateis selectedby thefirm
setting,thebonusrateincreasematters primar- manager.In thisexperiment, thefirmmanager
ily as a coordinatingdeviceratherthanforits is beingplayedby the computer.We will al-
directeffecton subjects'payoffs. ways let you knowthebonusratebeforeyou
choosehowmanyhourstodevotetoActivity A.
APPENDIX: INSTRUCTIONS FOR CELL 2 OF THE
EXPERIMENTALDESIGN Payoffs:The payoffthatan employeereceives
in a rounddependson thenumberof hourshe
GeneralInformation: The purposeof thisex- choosesto spendon Activity A, thenumberof
is to
periment study how peoplemakedecisions hourschosenby theothersin his firmto spend
in a particular Fromnowuntiltheend
situation. on ActivityA, andthebonusrateB selectedby
of the experiment, any communication with the firmmanager.The payoffforthe ith em-
otherparticipants is notpermitted.Ifyouhavea ployeeof thefirm,7ri,is givenby theformula
question,please raiseyourhandand one of us belowwhereHi is thenumber ofhoursspentby
will come to yourdeskto answerit. theithemployeeof thefirmon Activity A, and
You willreceive500 pesetasforshowingup min(HA)is the smallestnumberof hoursan
on timefortheexperiment. In addition,
youwill employeeofthefirmspendson Activity A. You
makemoneyduringtheexperiment. Uponcom- do not need to memorizethis formula-the
pletionof theexperiment theamountthatyou computer program willgiveyoupayoff tablesat
makewillbe paid to youin cash.Payments are anypoint where you need to make a decision:
confidential;no otherparticipant willbe toldthe
amountyou make. (Al) "ri= 200 - (5*Hi) + (B*min(H,)).
Parts, Rounds,and Groups: This experiment Thefirm manager'spayoff dependson thenum-

will have severalparts.In Part1 therewill be berofhoursspenton Activity A bytheemploy-
tenrounds.Afterthesetenroundshavefinished, ees of thefirmand thebonusrateB. The firm
we willgiveyouinstructions forthenextpartof manager'spayoffs, wrF,is givenby thefollow-
theexperiment. In each roundyou will be in a ing formula.Again, min(HA)is the smallest
groupwiththreeotherparticipants. The partic- number ofhoursan employeeofthefirm spends
ipantsyou are groupedwith willbe thesamein on Activity A. (Recall thatthefirmmanageris
all rounds. actuallybeingplayedbythecomputer. Nobody
is actuallyreceivingthese payoffs.)Do not
Description oftheDecisionTask(s)inPartI of worryabout memorizing thisformula,as the
theExperiment: You andtheothermembers of program displaysthefirm'spayofffunctionany
are
yourgroup employees of a firm. You can timeyou make a decision,and the computer
thinkof a roundof theexperiment as beinga automaticallycalculates the firmmanager's
workweek. In eachweek,eachoftheemployees payoffsforyou as a partof thefeedbackyou
in each firmspends40 hoursat thefirm.You receiveaftereach round:
have to choose how to allocateyourtimebe-
tweentwoactivities, Activity A andActivity B.
will be asked to choose how (A2) "nF= 100 + (60 - 4B)*min(HA).
Specifically,you
muchtimeto devoteto Activity A. The avail-
able choicesare0 hours,10 hours,20 hours,30 Playinga Round: Foreach roundoftheexper-
hours,and40 hours.Yourremaining hourswill iment,thecomputerwill displaya screenlike
be puttowardActivityB. For example,if you theone shownbelow.The payoffs shownin the
devote30 hoursto Activity A, thismeansthat payofftable will be adjustedforthe changing
10 hourswill be puttowardActivity B. valuesofB. Fortheexamplebelow,we setB =

TABLEAl-SAMPLE SCREEN FORINSTRUCTIONS

Bonus rate= 8
Firmpayoff= 100 + 28*min(HA)
Minimum
hoursspentonActivity
A byother
employees
0 10 20 30 40
A
My hourson Activity 0 200 200 200 200 200
10 150 230 230 230 230
20 100 180 260 260 260
30 50 130 210 290 290
40 0 80 160 240 320
TABLEA2-PAYOFFSFORPAYOFF QUIZ
Bonus rate= 8
Firmpayoff= 100 + 28*min(H,)
Minimumhoursspenton Activity
A by other
employees
0 10 20 30 40
A
My hourson Activity 0 200 200 200 200 200
10 150 230 230 230 230
20 100 180 260 260 260
30 50 130 210 290 290
40 0 80 160 240 320
8. Noticethatthisis displayedabovethepayoff Payment:Attheendoftheexperiment youwill

table. be paid,in cash,thesumofthepayoffs thatyou
Each employeewill choose a numberof will have earnedin the roundsof the experi-
hoursto spendon Activity A usingthebuttons ment.As notedpreviously,you will be paid
on theright-hand side of thescreen.You may privatelyandwe willnotdiscloseanyinforma-
changeyourchoices as oftenas you like,but tion aboutyouractionsor yourpayoffto the
once you clickon "Enter"yourchoiceis final. otherparticipantsin theexperiment.
Note thatwhenyou make yourdecisionyou
willnotknowwhattheotheremployeesin your PayoffQuiz: Beforewe begintheexperiment,
firmare doingin theround. please answerthefollowingquestions.For all
At no pointin timewillwe identifytheother of thesequestions,assume thatB = 8. This
in
employees your firm. In otherwords,the givesemployeesthepayofftableshownbelow.
actionsyoutakein thisexperiment willremain We will go throughthe answersto a sample
confidential. problembeforeyou do the restof the quiz.
Please raiseyourhandifyouarehavingtrouble
InformationThatYou WillReceive: Aftereach answeringone of thequestions.
roundyouwillbe informed aboutthenumber of
hoursyouhave spenton Activity A, thelowest Sample Question:Suppose you choose to
numberchosenby all of theemployeesin your spend 10 hourson ActivityA. The otherem-
firm,thefirm'spayoff,
yourpayoff forthelatest ployeeschooseto spend30,20, and40 hourson
round,and youraccumulatedpayoffsthrough ActivityA.
thecurrentround.You willalso be shownyour
decisionsand thedecisionsof all theotherem- The minimum numberofhoursan employee
ployees of your groupfromthe currentand of thefirmspendson Activity
A is
previousrounds. Your payoffis pesetas.

1) Suppose you choose to spend20 hourson Camerer, ColinF.; Ho,Teck-Hua andChong, Juin-
ActivityA. The otheremployeeschoose to Kuan."Sophisticated Experience-Weighted At-
A.
spend30, 0, and 10 hourson Activity tractionLearningand StrategicTeachingin
The smallestnumberof hoursan employee RepeatedGames."JournalofEconomicThe-
ofthefirmspendson Activity A is . ory,2002,104(1),pp. 137-88.
Your payoffis pesetas. Ciccone,Antonioand Matsuyama,Kiminori.
2) Suppose you choose to spend 0 hourson "Start-upCosts and PecuniaryExternalities
ActivityA. The otheremployeeschoose to as Barriers to Economic Development."
spend20, 30, and 10 hourson Activity
A. Journalof DevelopmentEconomics,1996,
The smallestnumberof hoursan employee 49(1), pp. 33-59.
of thefirmspendson ActivityA is . Cooper,DavidJ.andKagel,JohnH. "TheImpact
Your payoffis pesetas. of MeaningfulContexton StrategicPlay in
3) I amgroupedwiththesamethreeindividuals SignalingGames."JournalofEconomicBe-
for all 30 rounds of the experiment havior and Organization,2003, 50(3), pp.
(True/False)? 311-37.
4) My actionsand payoffswill be confidential Cooper,DavidJ. and Kagel,JohnH. "Learning
(True/False)? and Transferin SignalingGames." Unpub-
lishedPaper,2004.
forPart1
Instructions Cooper,DavidJ. and Kagel,JohnH. "AreTwo
For thenexttenrounds,thebonusrateB equals 6. Heads BetterThan One? Team versusIndi-
notby another
This bonus ratewas set by thecomputer,
humanparticipant.
vidualPlay in SignalingGames."American
EconomicReview,2005,95(3), pp. 477-509.
forPart2
Instructions Crawford, VincentP. "An 'Evolutionary' Inter-
For thenexttenrounds,thebonusrateB equals 10. of Van Huyck,Battalio,and Beil's
notby another
This bonusratewas set by the computer,
pretation
humanparticipant. ExperimentalResults on Coordination."
Gamesand EconomicBehavior,1991,3(1),
forPart3
Instructions pp. 25-59.
For thenexttenrounds,thebonusrateB equals 10. Hirschman, AlbertO. Thestrategy ofeconomic
This bonusratewas set by thecomputer,notby another New Haven: Yale University
humanparticipant.
development.
Press,1958.
Ichniowski,Casey;Shaw,Kathryn and Prennushi,
Giovanna."The Effectsof HumanResource
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University Texas,Cen- Signaling Games." Unpublished Paper,2003.


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American Economic Association

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

Westudyhowfinancialincentives can be usedtoovercomea history ofcoordination

Coordinationfailurecan cause corporations elsewhere.Only if our hypothetical workeris

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

no sectorcan breakevenindustrializing alone.2 large changes in the bonus rate lead to no

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

experienceweightedattraction modelof learn- a playerto raisehis effortlevel ifand onlyifit

As describedby MichaelKremer(1993), for

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This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

TABLE1-PAYOFFTABLES ing, but also potentially

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TABLE 2-LIST OF TREATMENTS

Cell 1 Cell 2 Cell 3 Cell 4 Cell 5 Cell 6

thefirmswillhaveconvergedto an effort level thatsubjectscan overcometheweakened

Hypothesis2 focuseson behaviorin rounds Sessionswererunat PompeuFabraUniver-

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secondsession.All data forthesesubjectsand adjustedto reflect thecurrent bonusrate.Atthe

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but,as shall be seen, nontrivial to overcome comedependson theminimum effortchosenby

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ployeej in firmi in roundt,letXij,be thevector cultyofturning arounda "failing"firm,

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

sameforB = 8 andB = 10 in rounds16-20. If potheses1(a) and 1(c). Hypothesis1(b) is not

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

themorepowerful randomeffectsspecification The figurealso shows,as a pointofcomparison,

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-Bonus-6 -Bonus-O -Bonus-14 -PooledData,RoundsI1-10(B - 6)

FIGURE 2. COMPARISON OF TREATMENTS, ROUNDS 21-30, AND CONTROL, ROUNDS 1-10

round29 as in round20.26 Amongthe nine effortlevel in round21 whenthe bonus rate

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TABLE 5-ORDERED PROBITREGRESSIONSON DATA FROMCELLS 1, 4, AND 5, ROUNDS6-10 AND 21-30

Data type dataminimum

thebonusrate,and rounds21-30 are included. (rounds26-30)*(B = 6). Lookingat eitherfirm-

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

an increasemaybe important. Thisleadsto our untilround21, employeeswho at firstmoveto

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Data type data minimum

base. The primary independent variablesare a therea unified modelthatcan explainthesereg-

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data--manylaggardswho don't initiallyim- theticalpayoffsare determined by a parameter

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This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

effort in thesimulations forround10-20. Note by increasingthe resetparameter. Generating

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teachingadds individualswho understand that model.35The large changein effortin round

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V. FinalRemarks thefirm manager forrounds11-30.In someofthe

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Parts, Rounds,and Groups: This experiment Thefirm manager'spayoff dependson thenum-

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

TABLEAl-SAMPLE SCREEN FORINSTRUCTIONS

8. Noticethatthisis displayedabovethepayoff Payment:Attheendoftheexperiment youwill

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

This content downloaded from 128.171.57.189 on Thu, 9 Oct 2014 16:07:29 PM

Liang,Kung-yee and Zeger,ScottL. "Longitudi- ter for Applied Research in Economics