Dynamic Coordination via Organizational Routines

We investigate dynamic coordination among members of a problem-solving team who receive private signals about which of their actions are required for a (static) coordinated solution and who have repeated opportunities to explore different action combinations. In this environment ordinal equilibria, in which agents condition only on how their signals rank their actions and not on signal strength, lead to simple patterns of behavior that have a natural interpretation as routines. These routines partially solve the team’s coordination problem by synchronizing the team’s search efforts and prove to be resilient to changes in the environment by being ex post equilibria, to agents having only a coarse understanding of other agents’ strategies by being fully cursed, and to natural forms of agents’ overconfidence. The price of this resilience is that optimal routines are frequently suboptimal equilibria. Preliminary Version We thank Tim Grebe, Zhike Lei, Ariel Rubinstein, Yuuso Välimäki, Mary Zellmer-Bruhn, and especially Robert Gibbons for helpful comments. We are also grateful to seminar and conference audiences at the Berlin Behavioral Economics Workshop, University of Bonn, UNC/Duke Theory Workshop, Johns-Hopkins University, University of Pittsburgh, MIT/Sloan Seminar in Organizational Economics, Econometric Society Summer Meetings, SFB/TR GESY conference in Mannheim, conference on Strategic Information Acquisition and Transmission in Munich, and the Society for Economic Dynamics. Paul Heidhues acknowledges financial support from the German Science Foundation (SFB/TR GESY). ∗Department of Economics, University of Pittsburgh, 230 South Bouquet Street, Pittsburgh, PA 15260, USA; †Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, ON M5S 3E6, Canada; ‡Lufthansa Chair in Competition and Regulation, ESMT, Schlossplatz 1, 10178 Berlin, Germany, CESifo, and CEPR. . . . the essence of an organizational routine is that individuals develop sequential patterns of interaction which permit the integration of their specialized knowledge without the need for communicating that knowledge. R.M. Grant [Organization Science, 1996]