Scandinavian Working Papers in Economics

Comparative Institutional Analysis Working Paper Series,
Lund University, Comparative Institutional Analysis, School of Economics and Management

No 2014:1: Organizational coordination and costly communication with boundedly rational agents

Jens Dietrichson () and Torsten Jochem ()
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Jens Dietrichson: Department of Economics, Lund School of Economics and Management, Lund University
Torsten Jochem: Faculty of Economics and Business, University of Amsterdam

Abstract: How does costly communication affect organizational coordination? This paper develops a model of costly communication based on the weakest-link game and boundedly rational agents. Solving for the stochastically stable states, we find that communication increases the possibilities for efficient coordination compared to a setting where agents cannot communicate. But as agents face a trade-off between lowering the strategic uncertainty for the group and the costs of communication, the least efficient state is still the unique stochastically stable one for many parameter values. Simulations show that this is not just a long run phenomena, the stochastically stable state is the most frequent outcome also in the short run. Making communication mandatory induces efficient coordination, whereas letting a team leader handle communication increases efficiency when the leader expects others to follow and has enough credibility. The results are broadly consistent with recent experimental evidence of communication in weakest-link games.

Keywords: Organizational coordination; Commmunication; Stochastic stability; Bounded rationality; Simulation

JEL-codes: C73; D23; L22; L23

35 pages, April 9, 2014

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