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Managerial incentives for process innovation

  • Bastiaan M. Overvest

    (Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands)

  • Jasper Veldman

    (Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands)

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    Cost-reducing investments by firms are often not publicly observable. This lack of observability would preclude a strategic use of process innovation. However, we show that an observable and verifiable contract that provides direct monetary incentives for cost reductions - an innovation incentive contract - can act as a strategic commitment device. Our model predicts that manager-led firms are more innovative than owner-led firms and that these contracts become less prevalent as product market competition intensifies. Both predictions are consistent with recent empirical evidence. Copyright © 2008 John Wiley & Sons, Ltd.

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    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 29 (2008)
    Issue (Month): 7 ()
    Pages: 539-545

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    Handle: RePEc:wly:mgtdec:v:29:y:2008:i:7:p:539-545
    DOI: 10.1002/mde.1416
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    7. Dirk Czarnitzki & Kornelius Kraft, 2004. "Management Control and Innovative Activity," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 24(1), pages 1-24, 02.
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