Delegated Innovation Scouting when Success is Rare: A Behavioral Investigation

Abstract

Firms involved in the widespread practice of (delegated) innovation scouting face a crucial challenge: How to motivate innovation scouts to engage in extensive search for innovative projects given that search success oftentimes eludes them? Motivated by common scouting practice, we build a (behavioral) principal-agent model to study the optimal structure of formal incentive schemes as well as the performance of contract schemes that rely on discretionary and non-contractible rewards. Our analyses show that the delegation of parallel scouting efforts presents firms with a difficult trade-off between contract efficiency and fairness. We then test our key predictions in a controlled laboratory experiment that varies scouts’ success chances, their contract type, and the institutional antecedents for reciprocity. Our results are consistent with managers’ preference to design fair contracts. However, fair contracts fail to provide sufficient scouting incentives, such that scouts search substantially fewer projects than optimal. Scouting performance degrades most strongly in low success probability environments that are common in innovation scouting practice.

Keywords: external innovation, parallel search, delegation, incentives, trust, superficial fairness