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 to 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.