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Strategic Exploration for Innovation

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  • Shangen Li

Abstract

This paper introduces a framework to study innovation in a strategic setting, in which innovators allocate their resources between exploration and exploitation in continuous time. Exploration creates public knowledge, while exploitation delivers private benefits. Through the analysis of a class of Markov equilibria, we demonstrate that knowledge spillovers accelerate knowledge creation and expedite its availability, thereby encouraging innovators to increase exploration. The prospect of the ensuing superior long-term innovations further motivates exploration, giving rise to a positive feedback loop. This novel feedback loop can substantially mitigate the free-riding problem arising from knowledge spillovers.

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  • Shangen Li, 2021. "Strategic Exploration for Innovation," Papers 2108.07218, arXiv.org, revised Dec 2023.
    • Handle: RePEc:arx:papers:2108.07218
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    References listed on IDEAS

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    1. Strulovici, Bruno & Szydlowski, Martin, 2015. "On the smoothness of value functions and the existence of optimal strategies in diffusion models," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 1016-1055.
    2. Bruno Strulovici & Martin Szydlowski, 2012. "On the Smoothness of Value Functions," Discussion Papers 1542, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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