Bad Rules Beat Good People
How Systems Can Shape Behavior More Than Motivation
One Takeaway: Most companies treat coordination failures as motivation problems. If people just cared more, collaborated better, or aligned harder, things would work. This gets it backwards. The job of leadership isn’t motivating people to cooperate against their interests. It’s designing systems where cooperation becomes the default choice. Get the system right and you don’t need everyone to be the ideal version of themselves every day.
Every article in this series has circled the same observation. Organizations fail at coordination not simply because people are selfish or lazy ,but because the systems they operate within can unintentionally make cooperation irrational. Misaligned incentives punish collaboration (”The Cost of Working Together”). Reporting structures strip out the knowledge that matters (”What Headquarters Can’t See“). Measurement systems destroy the most valuable but least measurable work (”Why Metrics Kill Innovation“).
The common thread is that in each case, the people weren’t the problem. The rules were.
Economist James Buchanan won the Nobel Prize in part for applying this insight to political institutions. His core question wasn’t “how do we get better politicians?” It was “how do we design rules so that self-interested political actors produce outcomes that serve the public interest?” He argued that focusing on the character of the people inside a system is a losing strategy. Focusing on the rules of the system itself is where lasting improvement comes from.
The same logic applies inside every organization. And almost nobody applies it there.
The Motivation Trap
Most management approaches treat coordination failure as a motivation problem. Teams aren’t collaborating? Inspire them. Departments are siloed? Build culture. Innovation is dying? Bring in a speaker to talk about the importance of risk-taking.
All this assumes that if people cared enough, they’d cooperate. The default solution is to make them care more. Hire only those who bleed ping, or black, or whatever color is in your brand toolkit. This can work for a bit, but it’s unsustainable.
This approach has a fundamental flaw. It requires everyone to be the best version of themselves at all times. On the days they love the company, they go above and beyond. They bridge gaps between departments. They flag problems that aren’t their responsibility. They pursue opportunities that don’t fit their metrics. On the days they’re tired, frustrated, or simply focused on their own deliverables, the coordination fails.
As Steven Kerr explains in his famous article “On the Folly Of Rewarding A and Hoping for B”, this turns the organization into “a fortunate bystander” rather than an active force shaping behavior. Some people will be generous with their time and attention regardless of incentives. Some will bridge cross-functional gaps out of personal commitment. But the organization isn’t causing these behaviors. It’s just getting lucky when they happen.
Kerr’s insight cuts to the core: “By altering the reward system the organization escapes the necessity of selecting only desirable people or of trying to alter undesirable ones... where such reinforcement exists, no one needs goodness (Kerr pg. 782).”
That last phrase is vital. A well-designed system doesn’t need everyone to be selfless. It needs the rules to make cooperation individually beneficial. The goal is for people to do the right thing for the organization on their best days and their worst days, because the right thing for the organization is also the right thing for them.
Design Problems, Not Motivation Problems
Buchanan’s contribution was reframing political dysfunction from a people problem to a rules problem. Bad outcomes don’t always come from bad people (to be clear, bad people are a problem too). They instead can come from rules that make bad outcomes individually rational.
Inside organizations, the same reframing transforms how you approach every persistent coordination failure.
The motivation framing: “Our teams aren’t collaborating on cross-functional problems. We need to build a culture of collaboration. Let’s do an offsite. Let’s bring in a facilitator. Let’s have the leadership team set the example and model the behavior we want to see.”
The design framing: “Our teams aren’t collaborating on cross-functional problems because each team is measured on independent metrics that make collaboration a sacrifice. Product loses momentum. Sales loses pipeline time. Customer success loses ticket resolution speed. The system punishes collaboration. Let’s redesign the incentives so that success is profitable for every team involved.”
The first approach asks people to act against their incentives. It works briefly. Offsites generate enthusiasm, facilitators create temporary alignment. But when you get back in front of your computer it fades as people return to the daily reality of how they’re actually measured and rewarded.
The second approach changes the daily reality. It doesn’t require sustained enthusiasm or cultural transformation. It requires getting the rules right, then letting self-interest do the work that motivation can’t sustain.
This is what Buchanan meant by focusing on the rules of the game rather than the players. You don’t need better people. You need better rules.
What Good Rules Look Like
Buchanan’s work gives us an important principle: focus on the rules of the game rather than the character of the players. But principles need evidence. How do you actually design rules that produce voluntary cooperation? For that, we turn to Elinor Ostrom.
Ostrom won the Nobel Prize for studying a problem economists had largely given up on. She researched how communities manage shared resources without either markets or top-down control. Conventional theory predicted that fisheries, forests, and irrigation systems held in common would be overused and destroyed. This is famously known as the “tragedy of the commons.” Ostrom went and looked at actual communities around the world and found something different. Many of them had developed rules that produced voluntary cooperation for generations without external enforcement.
What made these systems work wasn’t better people. It was better rules. Ostrom identified specific design principles that successful self-governing communities shared. These principles can translate directly to the cross-functional coordination challenges inside organizations. Combined with Buchanan’s insights, her research points to five rules for designing systems where cooperation becomes the default choice.
Rules must make cooperation profitable for individuals, not just the organization. It’s not enough for collaboration to be “good for the company.” Each worker needs to see personal benefit. Shared success metrics where all participating functions receive bonuses based on collective outcomes. Joint budget authority where teams must agree on allocation, creating natural negotiation that reveals real priorities. Career advancement paths that reward cross-functional contribution, not just siloed performance.
People who live under the rules should design them. Ostrom’s research showed that systems imposed from the top fail far more often than those designed by the affected parties. When teams co-design their collaboration processes, they build in features that work for their context. When leadership imposes frameworks, they create compliance without commitment. The difference is a focus on information rather than buy-in. The people doing the work know which rules would actually help and which would just add complexity.
Rules must match the type of work. One-size-fits-all solutions create unnecessary friction. Operator coordination needs formal standards and clear processes. Creator coordination needs lightweight check-ins and experimental flexibility. Refiner coordination needs structured improvement cycles with room for iteration. Applying operator rules to creator work kills innovation. Applying creator rules to operator work creates chaos. Good system design is specific to context.
Rules must have graduated consequences. Ostrom also found that successful rules start with mild consequences for non-cooperation. Things like peer feedback and reputation effects are helpful steps before escalating to formal consequences. This keeps enforcement costs low and maintains relationships. Most conflicts can get corrected informally when the rules are well-designed. Heavy-handed enforcement from the start signals distrust and creates resistance.
Rules must be supported by legitimate authority. When leadership respects cross-functional decisions made through these processes, those processes work. When they override them arbitrarily, people learn that the real authority is elsewhere. The coordination system collapses. The rules only function if the organization genuinely commits to them.
Why This Isn’t Just “Better Incentive Design”
You might read this and think: this is just about aligning incentives. HR and compensation teams already work on this.
It’s deeper than that. Compensation is one lever. Buchanan’s insight is about the entire system. Things like decision rights, information flows, authority, evaluation frameworks, resource allocation processes, career paths all shape behavior independently of compensation.
Consider the persistent cross-functional problems in your organization. The ones that survive every reorg and every new initiative. These problems persist not because your compensation structure is wrong (though it might be). They persist because the full system of rules makes those problems nobody’s rational priority to solve. Rules like: Who has authority? Who has information? Who gets evaluated on what? Who allocates resources? Who resolves disputes?
This is the gap that your organization may be currently filling with hope. Hoping that someone will take ownership of cross-functional problems that don’t appear in anyone’s metrics. Hoping that teams will collaborate despite incentives that point in different directions. Hoping that people will flag problems that aren’t their responsibility because they care about the company.
Some will. On some days. But you’re banking on people being the ideal version of themselves to address gaps and misalignments as they come up. That’s not sustainable. You need systems where people do their job well on the days they love the company and on the days they feel differently. The success of your company depends on building rules where people aren’t assumed to be the ideal version of a worker. You need systems where cooperation happens because it’s rational, not because it’s virtuous.
The Connection Across This Series
This idea to design rules for voluntary cooperation rather than hoping for motivated compliance is the economic logic underneath every concept in this series.
Transaction costs might be high because the rules make cooperation expensive. Redesign the rules (shared budgets, joint metrics, cross-functional authority) and cooperation becomes cheaper.
Knowledge doesn’t flow because the rules don’t make sharing rational. If the customer success manager’s insight about a struggling account doesn’t connect to any incentive or evaluation they face, why would they invest time translating it for product development? Redesign the rules so that knowledge sharing is rewarded, and information flows.
Measurement kills innovation because the rules evaluate all work the same way. Redesign the rules (portfolio evaluation for creators, reliability metrics for operators, improvement metrics for refiners) and different types of work can coexist.
In every case, the intervention isn’t motivation. It’s design. Thinking like a harmonizer to design new rules and structures that make cooperation rational is Buchanan’s economic insights applied inside the firm. You can’t rely on inspiration to make people cooperate. You need to build systems where cooperation is the obvious choice.
The Bottom Line
Your organization’s cross-functional problems aren’t motivation problems. They’re economic problems. The people inside your organization are responding rationally to the rules, incentives, and structures they operate within. When those rules make cooperation a sacrifice, people won’t cooperate no matter how many offsites you run or team speeches you give.
Buchanan’s insight from political economy applies directly here. Focus on the rules of the game as much if not more than you focus on hiring. Design systems where self-interested behavior produces collective benefit. Make cooperation profitable for individuals, not just desirable for the organization. Build rules that work when people are at their best and when they’re not.
Where such systems exist, no one needs to rely on goodness alone. They just need rational self-interest, which is the one thing you can always count on.