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

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