Competition as a Coordination Device

The problem of coordination failure, particularly in "team production" situations, is central to a large number of mircroeconomic as well as macroeconomic models. As this type of inefficient coordination poses a severe economic problem, there is a need for institutions fostering efficient coordination of individual economic plans. In this paper, we introduce a rather classical such economic institution: Competition. In a series of laboratory experiments, we reveal that the true reason for coordination failure is strategic uncertainty which can be reduced almost completely by introducing a appropriately designed meachnism of (inter-group) competition