In a column some months back<\/a>, I presented the basic concept behind the Prisoner\u2019s Dilemma and talked about some of the most common applications in economic circles.\u00a0 In this column I will discuss a somewhat discouraging application of these concepts to the relationship between business and workers (or firm and employee or management and labor, etc., as you prefer).<\/p>\n The particular type of business I will be talking about is a government contractor in the technical sector. \u00a0Businesses like these depend on a highly-trained and technically savvy work force to be able to bid on and win new work.\u00a0 Central to the ability to credibly bid on new work is the idea that the firm and\/or its workforce can set itself apart from its competitors in one or more of three distinct ways: 1) offering equal technical competency for a lower cost, 2) offering structured processes that lower risk and ensure delivery on cost and schedule, or 3) offering innovative solutions that enable new technology or a new opportunities.\u00a0 The application I will deal with is the last case, but the attentive reader can adapt this example to the other two.<\/p>\n Typically the ability to innovate new technology on government contracts is limited by two factors.\u00a0 The first is that government contracts with a specific research and development (R&D) focus are rare and becoming even rarer as federal spending on basic research drops.\u00a0 Second, unless otherwise negotiated, the intellectual property for any research done on a federal contract is typically owned by the government.\u00a0 Even in those cases where rights are granted for commercialization, the government retains limited ownership and exercising the ability to commercialize may be hard to do.<\/p>\n As a result, the general idea is to own the intellectual property itself and to leverage the intellectual property into increased profits.\u00a0 And therein lies the rub \u2013 who owns the intellectual property and who benefits from the increased profits?<\/p>\n From management\u2019s point-of-view, the firm wants to produce a body of intellectual property by engaging the employees\u2019 talents in creating innovative technologies for the good of the firm. \u00a0The business: 1) provides the work environment in which the employee can tackle interesting problems, 2) actively pursues new business, 3) insulates the employee from the day-to-day hassle of running an enterprise, and 4) maintains the employee\u2019s wage level even when profits decrease or disappear (\u2018sticky wages\u2019<\/a>).<\/p>\n Since the continued existence of the worker\u2019s job is predicated on the health of the business, it is natural for management to expect that the worker will contribute to the overall health of the firm by shouldering some of the burden of making the company competitive.\u00a0 How then does the business encourage the worker to apply his talent to creating intellectual property that the business can own?<\/p>\n Likewise, an employee wants to produce his own intellectual property for continued advancement and increasing wages and compensation.\u00a0 The two main components of this capital are the technical skills required to perform the jobs in his sector and the external recognition that he can muster these skills to bring a complicated piece of work to fruition. \u00a0The employee provides: 1) the technical expertise and education need to be able to innovate, 2) the dedicated time needed to concentrate on a problem and deliver solutions and 3) the perseverance and intellectual fortitude to find these solutions.<\/p>\n Since the continued health of the business depends on the condition of its workforce, it is natural for the worker to expect that the business will provide opportunities for the employee to develop innovative solutions to complicated and challenging technical assignments and will support and assist the employee in generating tangible proof that he actually developed intellectual property rather than just use the fruits of someone else\u2019s labor (e.g. patents or papers).\u00a0 How then does the worker encourage the business to provide the infrastructure that benefits him?<\/p>\n If both sides could trust that the other will cooperate and compromise, then they each would get an attractive payoff.\u00a0 The problem is that the business worries that, after all their investment in securing interesting work, the employee will either shirk his responsibilities and just collect a paycheck or that he will take all the credit and then head off to greener pastures.\u00a0 Likewise the employee worries the business will keep all the intellectual property for itself and take credit for the hard work and talent that he mustered.\u00a0 The situation abounds with questions of trust and with structured payoffs that are directly related to the Prisoner\u2019s Dilemma.<\/p>\n Consider first the payoff matrix from the perspective of the business.\u00a0 Its choices are either to trust the employee and invest in increased wages and\/or improved infrastructure (e.g send the employee to a conference) or to safeguard against the employee shirking his responsibilities by keeping wages static and by avoiding infrastructure investments that benefit the employee, until the employee delivers. \u00a0\u00a0The payoffs are then described by the company as:<\/p>\n