Innovation in Firms: Experimentation and Strategic Communication

57 Pages Posted: 23 Dec 2022 Last revised: 10 May 2023

See all articles by Tim Baldenius

Tim Baldenius

Columbia University - Columbia Business School

Li Azinovic-Yang

University of Chicago - Booth School of Business

Date Written: December 13, 2022

Abstract

How is innovation affected by information asymmetry within firms? A CEO privately
learns valuable project information and communicates it strategically to the board. The board decides how much to invest and which project to continue with going forward. This project guidance motive can result in more experimentation than under symmetric information. Strategic communication creates innovation convexity, favoring radical or incremental over moderate experimentation. Surprisingly, experimentation may be optimal even if, conditional on an early success, it offers no better future project prospects than a routine project. Overall, information frictions within firms can alleviate the underprovision of innovation due to free-riding.

Keywords: innovation, capital budgeting, exploration versus exploitation, delegation, strategic communication

JEL Classification: G31, M21, D21, D83

Suggested Citation

Baldenius, Tim and Azinovic-Yang, Li, Innovation in Firms: Experimentation and Strategic Communication (December 13, 2022). Available at SSRN: https://ssrn.com/abstract=4300767 or http://dx.doi.org/10.2139/ssrn.4300767

Tim Baldenius

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Li Azinovic-Yang (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

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