• Corpus ID: 237091710

Strategic Exploration for Innovation

@inproceedings{Li2021StrategicEF,
  title={Strategic Exploration for Innovation},
  author={Shang-ao Li},
  year={2021}
}

• Shang-ao Li
• Published 16 August 2021
• Economics

We analyze a game of technology development where players allocate resources between exploration, which continuously expands the public domain of available technologies, and exploitation, which yields a flow payoff by adopting the explored technologies. The qualities of the technologies are correlated and initially unknown, and this uncertainty is fully resolved once the technologies are explored. We consider Markov perfect equilibria with the quality difference between the best available technology and the latest technology under development as the state variable. In all such equilibria, while the players do not fully internalize the benefit of failure owing to free-riding incentives, they are more tolerant of failure than in the single-agent optimum thanks to an encouragement effect. In the unique symmetric equilibrium, the cost of exploration determines whether free-riding prevails as team size grows. Pareto improvements over the symmetric equilibrium can be achieved by asymmetric equilibria where players take turns performing exploration.