Underweighting Rare Breakthroughs in Innovation: A Challenge to Solving Free Riding

ABSTRACT Innovation can be conceptualized as a public good – its benefits extend beyond the innovator, to both society at large and other innovators in particular. In traditional public good games, even though social welfare is maximized when all agents contribute, rational agents do not contribute due to the incentive to free ride. The same holds true when innovation is treated as a public good, as we conceptualize it. An accepted solution to encourage innovative behavior is through privatization mechanisms, such as patents, which restrict benefits to the innovator, making the decision to innovate more lucrative. However, real-world innovation is inherently uncertain, with outcomes that are probabilistic rather than guaranteed. Therefore, to better reflect the innovative decision environment, this study introduces stochasticity into the public good game. While game theoretic analysis predicts that privatization should incentivize innovation, we demonstrate that behavioral biases undermine this effect. As a result, relying on privatization alone may be insufficient, and alternative mechanisms to foster innovation should be considered.