Motivating Innovation: Tunnels vs. Funnels

Abstract

The tentative pursuit of parallel projects in an innovation funnel helps firms improve selection under uncertainty. Yet a risk of premature project termination may make employees more hesitant to innovate. Rewards to innovation, if at risk, become less attractive. My laboratory experiment indeed shows that employees who believe they have low task efficacy and, thus, face a high risk of termination often forego innovation. But funnels also attract: employees with high efficacy beliefs choose innovation more often although they, too, face an additional, albeit smaller, termination risk. Their innovation choices reveal a preference for allocation regimes that are more likely to spot and reward the ultimately most deserving innovators. Such meritocracy increases alongside project-selection accuracy. The uncertainty of innovation, thus, proves a rare context in which employees view a lack of organizational commitment positively. The meritorious self-sorting I document has implications for motivating risk-taking and organizing innovation within firms. Supplemental Material: The online appendix is available at https://doi.org/10.1287/stsc.2022.0156 .