EQUILIBRIUM PRINCIPAL-AGENT CONTRACTS Competition and R&D Incentives
AbstractWe analyze competition between firms engaged in R&D activities in the choice of incentive contracts for managers with hidden productivities. The equilibrium screening contracts require extra effort/investment from the most productive managers compared to the first best contracts: under additional assumptions on the hazard rate of the distribution of types we obtain no- distortion in the middle rather than at the top. Moreover, the equilibrium contracts are characterized by effort differentials between (any) two types that are always increasing with the number of firms, suggesting a positive re- lation between competition and high-powered incentives. An inverted-U curve between competition and absolute investments can emerge for the most pro- ductive managers, especially when entry is endogenous. These results persist when contracts are not observable, when they include quantity precommit- ments, and when products are imperfect substitutes.
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Bibliographic InfoPaper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 180.
Length: 35 pages
Date of creation: Mar 2010
Date of revision: Mar 2010
Principal-agent contracts; asymmetric information; endogenous market structures;
Other versions of this item:
- Federico Etro & Michela Cella, 2013. "Equilibrium Principal-Agent Contracts: Competition and R&D Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(3), pages 488-512, 09.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-28 (All new papers)
- NEP-BEC-2010-03-28 (Business Economics)
- NEP-COM-2010-03-28 (Industrial Competition)
- NEP-CTA-2010-03-28 (Contract Theory & Applications)
- NEP-INO-2010-03-28 (Innovation)
- NEP-TID-2010-03-28 (Technology & Industrial Dynamics)
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- Federco Etro & Michela Cella, 2010.
"Oligopolistic Screening and Two-way distortion,"
200, University of Milano-Bicocca, Department of Economics, revised Nov 2010.
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