Department of Economics and Business Economics

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.