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Innovation and Incentives: Evidence from Corporate R&D

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  • Josh Lerner
  • Julie Wulf

Abstract

Beginning in the late 1980s, American corporations began increasingly linking the compensation of central research personnel to the economic objectives of the corporation. This paper examines the impact of the shifting compensation of the heads of corporate research and development. Among firms with centralized R&D organizations, a clear relationship emerges: more long-term incentives (e.g. stock options and restricted stock) are associated with more heavily cited patents. These incentives also appear to be somewhat associated with more patent filings and patents of greater generality. We address endogeniety concerns in a variety of ways, including examining the impact of compensation for other key managers and utilizing an instrument based on spawning activity in the region. While we cannot determine whether the effect is due to better project selection or better people selection, the results continue to be consistent with our interpretation that performance pay of corporate R&D heads is associated with more innovative firms.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11944.

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Date of creation: Jan 2006
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Publication status: published as Lerner, Josh and Julie Wulf. "Innovation and Incentives: Evidence from Corporate R&D." Review of Economics and Statistics 89 (2007): 634-644.
Handle: RePEc:nbr:nberwo:11944

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Citations

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Cited by:
  1. Barros, Henrique M. & Lazzarini, Sergio G., 2009. "Meritocracy and Innovation: Is There a Link? Empirical Evidence from Firms in Brazil," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_162, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  2. Evans, Shane, 2010. "Innovation contracts with leakage through licensing," Working Papers, University of Tasmania, School of Economics and Finance 10282, University of Tasmania, School of Economics and Finance, revised 05 Oct 2010.
  3. Shahbaz Sheikh, 2012. "Do CEO compensation incentives affect firm innovation? Purpose–The purpose of this paper is to examine if the structure and design of CEO compensation has any effect on firm innovation. It further i," Review of Accounting and Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 1(1), pages 4-39, February.
  4. Ramana Nanda & Matthew Rhodes-Kropf, 2012. "Innovation and the Financial Guillotine," Harvard Business School Working Papers, Harvard Business School 13-038, Harvard Business School, revised Dec 2012.
  5. Fredrik Andersson & Matthew Freedman & John Haltiwanger & Julia Lane & Kathryn Shaw, 2009. "Reaching for the Stars: Who Pays for Talent in Innovative Industries?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 119(538), pages F308-F332, 06.
  6. Toivanen, Otto & Väänänen, Lotta, 2010. "Returns to Inventors," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7744, C.E.P.R. Discussion Papers.
  7. Guillaume Garnotel & Patrick Loux, 2008. "Politiques de rémunération des dirigeants et investissements liés à l'innovation dans les industries de haute technologie," Revue Finance Contrôle Stratégie, revues.org, revues.org, vol. 11(4), pages 65-85, December.
  8. N. Lacetera & L. Zirulia, 2008. "Knowledge Spillovers, Competition, and R&D Incentive Contracts," Working Papers 624, Dipartimento Scienze Economiche, Universita' di Bologna.
  9. Leiponen, Aija & Helfat, Constance E., 2006. "When Does Distributed Innovation Activity Make Sense? Location, Decentralization, and Innovation Success," Discussion Papers, The Research Institute of the Finnish Economy 1063, The Research Institute of the Finnish Economy.
  10. Cui, Victor & Ding, Waverly W. & Yanadori, Yoshio, 2011. "Compensation Structure and the Creation of Exploratory Knowledge in Technology Firms," Institute for Research on Labor and Employment, Working Paper Series, Institute of Industrial Relations, UC Berkeley qt4f7671kn, Institute of Industrial Relations, UC Berkeley.
  11. Nambisan, Satish, 2013. "Industry technical committees, technological distance, and innovation performance," Research Policy, Elsevier, Elsevier, vol. 42(4), pages 928-940.
  12. Guillaume Garnotel & Patrick Loux, 2011. "Définition des bonus des dirigeants et performance des entreprises de haute technologie," Revue Finance Contrôle Stratégie, revues.org, revues.org, vol. 14(3), pages 119-150, September.
  13. Claire Bonnard, 2011. "Les incitations à l'innovation dans le secteur privé," Post-Print, HAL halshs-00599700, HAL.
  14. Wolfgang Bessler & Christoph Becker & Daniil Wagner, 2009. "The Design and Success of Stock Options Plans for New Economy Firms in Germany," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, Pepperdine University, Graziadio School of Business and Management, vol. 12(4), pages 1-34 , Spring.
  15. Erika Harden & Douglas L. Kruse & Joseph R. Blasi, 2008. "Who Has a Better Idea? Innovation, Shared Capitalism, and HR Policies," NBER Working Papers 14234, National Bureau of Economic Research, Inc.
  16. Chakraborty, Atreya & Rzakhanov, Zaur & Sheikh, Shahbaz, 2014. "Antitakeover provisions, managerial entrenchment and firm innovation," Journal of Economics and Business, Elsevier, Elsevier, vol. 72(C), pages 30-43.

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