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The Hay and the Carrot: A Model of Corporate Sponsoring of Academic Research


  • Ralph Bayer

    (School of Economics, Adelaide University)

  • Eran Binenbaum

    (School of Economics, Adelaide University)


In a moral hazard model with relationship-speci?c investment (?hay?) and limited liability (no ?stick?), we compare two institutional regimes: one without, and one with, ex-post incentives (?carrot?). We examine the welfare implications of introducing ?carrots?. We use this model to analyze corporate sponsoring of academic research. Under restrictive technological assumptions, the introduction of carrots meets certain ciency criteria and cannot make the agent (researcher) worse. These results no longer hold once we allow for a ?bang-for-your-buck?ect - which occurs when the researcher?s following the sponsor?s preferred strategy results in the principal (sponsor) being able to achieve the same results with fewer investment dollars - in conjunction with a concave value function for the sponsor. In this case, the introduc- tion of carrots may be inecient and may make the agent worse. However, if the agent is a monopolist, a renegotiation-proof contract implies that the agent can never be made worse by the introduction of carrots, and carrots never reduce social welfare.

Suggested Citation

  • Ralph Bayer & Eran Binenbaum, 2005. "The Hay and the Carrot: A Model of Corporate Sponsoring of Academic Research," Centre for International Economic Studies Working Papers 2005-11, University of Adelaide, Centre for International Economic Studies.
  • Handle: RePEc:adl:cieswp:2005-11

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    1. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
    2. Catherine A Pattillo & Andrew Berg & Gian M Milesi-Ferretti & Eduardo Borensztein, 2000. "Anticipating Balance of Payments Crises--The Role of Early Warning Systems; The Role of Early Warning Systems," IMF Occasional Papers 186, International Monetary Fund.
    3. Christoph Fischer, 2004. "Real currency appreciation in accession countries: Balassa-Samuelson and investment demand," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 140(2), pages 179-210, June.
    4. Fleming, Wendell H. & Stein, Jerome L., 2004. "Stochastic optimal control, international finance and debt," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 979-996, May.
    5. Romain Duval, 2002. "What Do We Know About Long-run Equilibrium Real Exchange Rates? PPPs vs Macroeconomic Approaches," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 382-403, December.
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