Incentives for Public Experimentation

Abstract

A group of agents exert effort to generate random increments in a public flow of benefits. As benefits increase, net returns to effort decrease. We show that, in the unique symmetric Markov equilibrium with benefits as the state variable, effort drops as benefits increase and this may cause a welfare loss. Moreover, the same is true in the most efficient equilibrium if strategies condition on time and on the history of benefits. As a result, short-term productivity increases may reduce effort and welfare. In the context of an R&D partnership in which improvements in the collective technology raise the incentive to shift resources towards private activities, the appearance of a ‘low-hanging fruit’ may slow down progress.