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Race Meets Bargaining in Product Development

Author

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  • Emin Karagözoglu
  • Kerim Keskin
  • Cagri Saglam

Abstract

We introduce a model of product development in a firm. Our model describes the process as a multi-stage contest (i.e., race) with an endogenous length (with one stage or two stages) between two workers. We model the payments to workers from the new product using the normatively appealing Nash bargaining solution (see Nash, 1950). In our model the disagreement payoffs endogenously depend on the contest outcome. More precisely, a bargaining advantage is given to the leading worker in the product development contest. We analytically characterize subgame perfect equilibrium effort levels of workers and describe the conditions under which a full-edged final (as opposed to, say, a prototype) product is developed. Our comparative static analyses reveal economically intuitive insights. Finally, we provide an answer to the firm’s problem of optimal incentive provision (considering both collective and individual incentives).

Suggested Citation

  • Emin Karagözoglu & Kerim Keskin & Cagri Saglam, 2020. "Race Meets Bargaining in Product Development," CESifo Working Paper Series 8109, CESifo.
    • Handle: RePEc:ces:ceswps:_8109
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    product development; contests; Nash bargaining solution; optimal contracts; subgame perfect Nash equilibrium; race;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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