Coordination Failure and Multiple Equilibria in the Firm

Two components of work activity are considered: observed effort, which can be rewarded directly, and unobserved helping or communication in a team which increases productivity. Positivite spillovers from helping can generate multiple equilibria (as in imperfectly competitive macroeconomies). Under reasonable assumptions, a group incentive or share payment can block an inferior, low-cooperation equuilibrium, and complement peer-pressure to elicit a finite increase in cooperation and productivity, even when the team is large and the share, s1/n, is small. Thus we have a solution of the 1/n problem that has puzzled observers of the association between profit-sharing and productivity gains.