Motivating Innovation with a Misspecified Roadmap

We analyze a principal-agent relationship where a principal communicates a roadmap to guide an agent who is learning the value of innovation.

However, the agent is concerned that the roadmap is misspecified.

We find that the agent can fall into a breakthrough trap, where early unexplained success triggers a loss of trust in the roadmap, such that no contract can motivate him to continue innovating.

We also obtain an upper bound on the frequency of innovative activity that tightens as the degree of misspecification increases, which can cause ``exploration-exploitation'' cycles to emerge endogenously over time.