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Managerial Incentives, Innovation and Product Market Competition

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  • Zhentang Zhang
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    Abstract

    This paper investigates the strategic value of the managerial incentive scheme in affecting firms' incentive in R&D investment and their product market activities. Firstly, we find that in Cournot-quantity competition, owners strategically assign a non-profitmaximization objective to their managers. Consequently, managers in a delegation game invest more in cost-reducing R&D, and have higher output, lower prices and lower profits, as compared to profit-maximizers in a owner-run game. Secondly, we find that R&D collusion induces owners in a delegation game to choose more aggressive managerial incentives as compared to R&D competition, which in turn leads to increased R&D investment, reduced product prices and increased profits.

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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.38562.de/dp295.pdf
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    Bibliographic Info

    Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 295.

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    Length: 20 p.
    Date of creation: 2002
    Date of revision:
    Handle: RePEc:diw:diwwpp:dp295

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    Related research

    Keywords: Strategic Delegation; Managerial Incentives; R&D competition and R&D collusion.;

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    1. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December.
    2. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-306, December.
    3. Katz, Michael L., 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," Department of Economics, Working Paper Series qt79b870w0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    4. Rabah Amir, 1998. "Modelling Imperfectly Appropriable R&D via Spillovers," CIE Discussion Papers 1998-07, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    5. Jianbo Zhang & Zhentang Zhang, 1997. "R&D in a strategic delegation game," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 18(5), pages 391-398.
    6. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
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