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Exploration in teams and the encouragement effect: Theory and experimental evidence

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Abstract

This paper analyzes a two-person, two-stage model of sequential exploration where both information and payoff externalities exist and tests the derived hypotheses in the laboratory. We theoretically show that, even when agents are self-interested and perfectly rational, the information externality induces an encouragement effect: A positive effect of first player exploration on the optimality of the second player exploring as well. When agents have other-regarding preferences and imperfectly optimize, the encouragement effect is strongest. The explorative nature of the game raises the expected surplus compared with a payoff equivalent public goods game. We empirically confirm our main theoretical predictions using a novel experimental paradigm. Our findings are relevant for motivating and managing groups and teams innovating not only for private but also and especially so, for public goods.

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Von Essen, E., Huysentruyt, M., & Miettinen, T. (2020). Exploration in teams and the encouragement effect: Theory and experimental evidence. Management Science, 66(12), 5861–5885. https://doi.org/10.1287/mnsc.2019.3494

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