How Much Failure Should Be Tolerated in Collaborative Innovation?

Managing innovation requires investments into projects that are fraught with uncertainty. Furthermore, innovation projects typically require collaborative efforts from many stakeholders, all of which must be aligned toward a common goal. The challenges of managing collaborative efforts of multiple stakeholders are compounded by the weak links between those efforts and the subsequent outcomes. In the presence of these challenges, a business culture that tolerates failure is often advocated to better manage the individuals tasked with executing the innovation projects. We develop game-theoretic models to account for the team members' strategic interactions in response to management's tolerance for failure in innovation projects. We find that a tolerance for failure can reduce the incentives required to ensure that stakeholders exert costly efforts toward innovation projects, thereby leading to increased profits and a broader set of conditions where projects may be successfully undertaken. However, as the association between efforts and outcomes becomes more certain, incentives allowing tolerance for failure become more costly, and a strict policy of innovation management should instead be considered.