Incentives for Collective Innovation

Abstract

Agents exert hidden effort to produce randomly-sized innovations in a technology they share. Flow payoffs grow as the technology develops, but so does the marginal cost of effort. I characterise the unique symmetric MPE with the quality of the technology as the state variable. In this equilibrium, continuation payoffs may fall after an innovation. I show that this occurs (with positive probability) if the number of agents is sufficiently large. Allowing agents to discard innovations induces higher effort at all states in the symmetric MPE (which remains unique). Ex-ante payoffs are higher as well and, under natural conditions, they exceed those of all equilibria without disposal.