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Managerial incentives for process innovation

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  • Bastiaan M. Overvest

    (Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands)

  • Jasper Veldman

    (Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands)

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    Abstract

    Cost-reducing investments by firms are often not publicly observable. This lack of observability would preclude a strategic use of process innovation. However, we show that an observable and verifiable contract that provides direct monetary incentives for cost reductions - an innovation incentive contract - can act as a strategic commitment device. Our model predicts that manager-led firms are more innovative than owner-led firms and that these contracts become less prevalent as product market competition intensifies. Both predictions are consistent with recent empirical evidence. Copyright © 2008 John Wiley & Sons, Ltd.

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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 29 (2008)
    Issue (Month): 7 ()
    Pages: 539-545

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    Handle: RePEc:wly:mgtdec:v:29:y:2008:i:7:p:539-545

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    Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    1. d'ASPREMONT, Claude & JACQUEMIN, Alexis, . "Cooperative and noncooperative R&D in duopoly with spillovers," CORE Discussion Papers RP -823, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
    3. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Dirk Czarnitzki & Kornelius Kraft, 2004. "Management Control and Innovative Activity," Review of Industrial Organization, Springer, vol. 24(1), pages 1-24, 02.
    5. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
    6. Hauenschild, Nils, 2003. "On the role of input and output spillovers when R&D projects are risky," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1065-1089, October.
    7. Leahy, Dermot & Neary, J Peter, 1997. "Public Policy towards R&D in Oligopolistic Industries," American Economic Review, American Economic Association, vol. 87(4), pages 642-62, September.
    8. Vicente Cuñat & Maria Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1058-1082, 09.
    9. Adam B. Jaffe & Manuel Trajtenberg & Rebecca Henderson, 1992. "Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations," NBER Working Papers 3993, National Bureau of Economic Research, Inc.
    10. Michael Kopel & Christian Riegler, 2006. "R&D in a strategic delegation game revisited: a note," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(7), pages 605-612.
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    Cited by:
    1. Florian Englmaier, 2010. "Managerial optimism and investment choice," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(4), pages 303-310.
    2. Veldman, Jasper & Gaalman, Gerard, 2014. "A model of strategic product quality and process improvement incentives," International Journal of Production Economics, Elsevier, vol. 149(C), pages 202-210.

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