Employee-Based Innovation in Organizations : Overcoming Strategic Risks from Opportunism and Governance

Employees performing everyday tasks frequently acquire valuable new ideas and knowledge. Our formal analysis studies how organizations can benefit from employee-driven innovation by using incentives to overcome strategic risk from opportunism and governance. We use a game theory framework to analyze the strategic interactions involved and identify incentives under which valuable ideas will be revealed without appropriation (in equilibrium). Our analysis considers both the short-run and the long-run where governance can be adjusted to maximize expected future innovation profits. Innovation value, frequency, governance quality, and employee contestation costs are shown to play a salient role in determining the innovation incentives and equilibrium. Overall, our analysis and results provide a number of insights on how organizations can overcome frictions from strategic innovation risks to more fully mobilize their innovation potential and knowledge-based resources