Policy Seminars

Speaker: Florian Ederer

Topic: Launching a Thousand Ships: Incentives for Parallel Innovation

Date/Place/Time: Monday, Feb. 2, 2009 1:30PM - 3:00PM
UCLA Anderson School D307
A crucial aspect of the innovation process is the exchange of ideas when several workers or
teams explore new work methods in parallel. In such a setting, under-exploration may result
as workers attempt to free-ride on the new ideas generated by co-workers. This paper studies
optimal incentive schemes for innovation and shows that when workers can learn from each other’s
experience, incentives for innovation fundamentally differ from incentives for routine activities.
Optimal incentives for routine activities take the form of standard pay-for-performance where
only individual success determines compensation. In contrast, the optimal incentive scheme for
parallel innovation tolerates early failure and provides workers with long-term group incentives
for joint success. This result is in line with the empirical regularity that profit sharing, employee
ownership, and broad-based stock option plans are positively associated with innovative activity.
When subjects in a controlled laboratory experiment are asked to perform a task that requires
creativity and exploration, they attempt to free-ride on exploration if given standard pay-for-
performance contracts. Innovation success and performance is highest when subjects receive a
group incentive scheme that rewards long-term joint success.

Link to paper (if available): click here for paper