Research

Working Papers

• Dynamic Coordination with Switching Costs (with Luke Boosey)

Abstract: A key component to the efficient functioning of an organization is the successful coordination of activities by its constituent divisions. However, in many organizational settings, departments may be unable to process or understand the actions or techniques employed by others, let alone determine whether the procedures across departments are compatible. Moreover, it is often costly for each department to modify its procedures. In this paper, we introduce a model of dynamic coordination with costly switching, where two players are in search of compatible platforms. Since players lack a common language with which to describe the game, we focus on efficient symmetric equilibria. Our model predicts that players remain on their current platforms with certainty if their common belief about compatibility lies above a cutoff belief (that depends on the switching cost) and otherwise mix between switching platforms and remaining on their current platforms. In the presence of switching costs, the equilibrium switching probability increases as the common belief converges toward zero, but remains below 0.5 for all beliefs. We conduct an experiment to test whether behavior supports the equilibrium predictions of the model, varying (i) whether success occurs deterministically or stochastically when players are on compatible platforms and (ii) the cost of switching platforms. Behavior is mostly in line with comparative statics predictions, especially for the deterministic treatments, although subjects display a tendency to choose switching rates that are lower than optimal when their common belief is low.