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Controlling innovative projects with moral hazard and asymmetric information

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  • Bergmann, Rouven
  • Friedl, Gunther
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    Abstract

    We study optimal incentive contracts offered to a research and development (R&D) manager, who can propose an innovative project and is in charge of conducting this project. The manager has private information about the project profitability and he exerts unobservable levels of different kinds of effort in order to increase the feasibility of successfully completing the project in terms of meeting product specifications. In particular, we analyze a situation, in which two interrelated performance measures on different hierarchical levels are available for contracting purposes. We show how asymmetric information about the project and further characteristics of the project influence the weights of the performance measures. We also make a number of empirical predictions about the composition of compensation contracts for R&D managers.

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    Bibliographic Info

    Article provided by Elsevier in its journal Research Policy.

    Volume (Year): 37 (2008)
    Issue (Month): 9 (October)
    Pages: 1504-1514

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    Handle: RePEc:eee:respol:v:37:y:2008:i:9:p:1504-1514

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    Web page: http://www.elsevier.com/locate/respol

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    References

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    1. Shenhar, Aaron J. & Dvir, Dov, 1996. "Toward a typological theory of project management," Research Policy, Elsevier, vol. 25(4), pages 607-632, June.
    2. Scott Keating, A., 1997. "Determinants of divisional performance evaluation practices," Journal of Accounting and Economics, Elsevier, vol. 24(3), pages 243-273, December.
    3. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    4. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1987. "Appropriating the Returns from Industrial Research and Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 783-832.
    5. Honig-Haftel, Sandra & Martin, Linda R, 1993. " The Effectiveness of Reward Systems on Innovative Output: An Empirical Analysis," Small Business Economics, Springer, vol. 5(4), pages 261-69, December.
    6. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    7. Taylor, Curtis R, 1993. "Delivery-Contingent Contracts for Research," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(1), pages 188-203, April.
    8. Rajiv Lal & V. Srinivasan, 1993. "Compensation Plans for Single- and Multi-Product Salesforces: An Application of the Holmstrom-Milgrom Model," Management Science, INFORMS, vol. 39(7), pages 777-793, July.
    9. Mathias Dewatripont & Patrick Bolton, 2005. "Contract theory," ULB Institutional Repository 2013/9543, ULB -- Universite Libre de Bruxelles.
    10. Dosi, Giovanni, 1988. "Sources, Procedures, and Microeconomic Effects of Innovation," Journal of Economic Literature, American Economic Association, vol. 26(3), pages 1120-71, September.
    11. Amiya K. Basu & Rajiv Lal & V. Srinivasan & Richard Staelin, 1985. "Salesforce Compensation Plans: An Agency Theoretic Perspective," Marketing Science, INFORMS, vol. 4(4), pages 267-291.
    12. Davila, Antonio, 2003. "Short-term economic incentives in new product development," Research Policy, Elsevier, vol. 32(8), pages 1397-1420, September.
    13. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
    14. Dvir, Dov & Lechler, Thomas, 2004. "Plans are nothing, changing plans is everything: the impact of changes on project success," Research Policy, Elsevier, vol. 33(1), pages 1-15, January.
    15. Bushman, Robert M. & Indjejikian, Raffi J., 1993. "Accounting income, stock price, and managerial compensation," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 3-23, April.
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    Cited by:
    1. Evans, Shane, 2010. "Innovation contracts with leakage through licensing," Working Papers 10282, University of Tasmania, School of Economics and Finance, revised 05 Oct 2010.

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