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Delegation and R&D Incentives: Theory and Evidence from Italy


Author Info

  • Jakub Kastl

    (Stanford U.)

  • David Martimort


  • Salvatore Piccolo

    (University of Naples)


We study the relationship between delegation within organizations and innovation incentives. When a firm owner deals with a privately informed manager who undertakes an unverifiable R&D decision, we show that an organizational mode awarding autonomy to the manager spurs innovation incentives relative to arrangements based on vertical control. The idea is that delegation increases the manager's ex-post information rent and thus encourages his R&D effort relative to instances where contractual rules excessively limit his autonomy. This R&D-enhancing effect also increases (ex-ante) gains from trade and makes both contractual parties better off. However, we also show that because of asymmetric information, more intensive R&D investments have a negative impact on ex-post efficiency: By inducing a better distribution of R&D outcomes, arrangements awarding more autonomy to the privately informed manager strengthen the rent-extraction efficiency trade-off and thus exacerbate the underproduction result typically obtained in adverse selection environments. This unveils an inconsistency between ex-ante and ex-post efficiency which has been overlooked in previous work. Using data from the Italian manufacturing industry we test the theoretical model. The empirical results provide support for our predictions.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 1095.

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Date of creation: 2008
Date of revision:
Handle: RePEc:red:sed008:1095

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
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Cited by:
  1. Bloom, Nicholas & Van Reenen, John, 2011. "Human Resource Management and Productivity," Handbook of Labor Economics, Elsevier.
  2. Nicholas Bloom & Raffaella Sadun, 2012. "The Organization of Firms Across Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 127(4), pages 1663-1705.
  3. Nick Bloom & Raffaella Sadun & John Van Reenen, 2010. "Does Product Market Competition Lead Firms to Decentralize?," CEP Discussion Papers dp0966, Centre for Economic Performance, LSE.


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