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EQUILIBRIUM PRINCIPAL-AGENT CONTRACTS Competition and R&D Incentives

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Author Info

  • Federico Etro

    ()

  • Michela Cella

    ()

Abstract

We 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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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper180.pdf
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Bibliographic Info

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 180.

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Length: 35 pages
Date of creation: Mar 2010
Date of revision: Mar 2010
Handle: RePEc:mib:wpaper:180

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Keywords: Principal-agent contracts; asymmetric information; endogenous market structures;

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Cited by:
  1. Federco Etro & Michela Cella, 2010. "Oligopolistic Screening and Two-way distortion," Working Papers 200, University of Milano-Bicocca, Department of Economics, revised Nov 2010.

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