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Incentive contracts under product market competition and R&D spillovers

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  • Evangelia Chalioti

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Abstract

This paper studies cost-reducing R&D incentives in a principal-agent model with product market competition. It argues that moral hazard does not necessarily decrease firms’ profits in this setting. In highly competitive industries, firms are driven by business-stealing incentives and exert such high levels of R&D that they burn up their profits. In the presence of moral hazard, underprovision of R&D incentives due to risk sharing can generate considerable cost savings, implying higher profits for both rivals. This result indicates firms’ incentives to adopt collusive-like behavior in the R&D market. We also examine the agents’ contracts and the profits-risk relationship when cross-firm R&D spillovers occur. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Evangelia Chalioti, 2015. "Incentive contracts under product market competition and R&D spillovers," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 305-328, February.
  • Handle: RePEc:spr:joecth:v:58:y:2015:i:2:p:305-328
    DOI: 10.1007/s00199-014-0811-5
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Adriana Gama & Isabelle Maret & Virginie Masson, 2019. "Endogenous heterogeneity in duopoly with deterministic one-way spillovers," Annals of Finance, Springer, vol. 15(1), pages 103-123, March.
    2. Evangelia Chalioti, 2015. "Team Production, Endogenous Learning about Abilities and Career Concerns," Cowles Foundation Discussion Papers 2020, Cowles Foundation for Research in Economics, Yale University.
    3. Makoto Yano & Takashi Komatsubara, 2018. "Price competition or price leadership," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(4), pages 1023-1057, December.
    4. Chalioti, Evangelia & Serfes, Konstantinos, 2017. "Strategic incentives for innovations and market competition," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 427-449.
    5. Veldman, Jasper & Gaalman, Gerard J.C., 2015. "Competitive investments in cost reducing process improvement: The role of managerial incentives and spillover learning," International Journal of Production Economics, Elsevier, vol. 170(PB), pages 701-709.
    6. repec:hrv:faseco:34330170 is not listed on IDEAS

    More about this item

    Keywords

    Moral hazard; Process innovation; Cournot competition; R&D spillovers; Relative performance; D82; L13; O30;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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