Innovate Versus Imitate: Theory and Experimental Evidence

Abstract

We model and experimentally evaluate the trade-off between innovation and imitation commonly faced by firms and individuals. Innovation involves searching for a high payoff opportunity, but paying a cost to do so. Imitation involves avoiding the search cost and copying the most successful payoff opportunity uncovered thus far. We formulate a novel model of sequential innovation versus imitation decisions made by a group of n regret minimizing agents. We analyze the consequences of complete versus incomplete information about the distribution of payoffs from innovation on agent's decisions. We then study these predictions in a laboratory experiment where we find evidence in support of our theoretical predictions.

Keywords: Innovation, Imitation, Risk, Ambiguity, Regret Minimization, Experimental Economics

JEL Classification: C91, C92, D21, D81, O31