Contract Prolongation In Innovation Production As A Principal-Agent Problem With Moral Hazard
AbstractWe consider the problem between an employer and a research employee who has not finished a research project in time because of a lack of an innovative idea. The research project yields money in case of finishing it. The decision to be made is whether or not the researcher gets a contract prolongation. Giving him or her a prolongation is associated with a positive expected return for the employer, which may or may not exceed the expected costs of the prolongation. A principal-agent problem is formulated, in which the probability of success is determined by the research time allotted and the effort of the agent. The agent decides upon his effort given the salary (reduction), the share of research time, and the length of the prolongation. The employer takes a decision on these variables, knowing the agent’s first-order condition with respect to effort. For the decision on the length of the contract prolongation it is of crucial importance what impact the research-time share (or the teaching load) has on the probability density of success and on the effort chosen by the agent. All theoretically possible outcomes are discussed. In particular the decision of the faculty of economics at Maastricht University, not to give any prolongation, is discussed in terms of the model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Maastricht University, Maastricht Economic Research Institute on Innovation and Technology (MERIT) in its series Research Memorandum with number 036.
Date of creation: 2001
Date of revision:
economics of technology ;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Arijit Sen, 1996. "Termination Clauses in Long-Term Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(4), pages 473-496, December.
- Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May.
- Flinn, Christopher J, 1997. "Equilibrium Wage and Dismissal Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 221-36, April.
- Kamien, Morton I. & Schwartz, Nancy L., 1980. "A generalized hazard rate," Economics Letters, Elsevier, vol. 5(3), pages 245-249.
- repec:sae:ecolab:v:7:y:1996:i:2:p:262-284 is not listed on IDEAS
- Cantor, Richard M, 1988. "Work Effort and Contract Length," Economica, London School of Economics and Political Science, vol. 55(219), pages 343-53, August.
- Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
- Morton I. Kamien & Nancy L. Schwartz, 1980. "A Generalized Hazard Rate," Discussion Papers 435, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Charles Bollen).
If references are entirely missing, you can add them using this form.