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Incentives for Research Agents: Optimal Contracts and Implementation

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  • Yaping Shan

    () (School of Economics, University of Adelaide)

Abstract

We study the agency problem between a firm and its research employees. In a multi-agent contracting setting, we show explicitly the way in which the optimal incentive regime is a function of how agents' efforts interact with one another: relative-performance evaluation is used when their efforts are substitutes whereas joint-performance evaluation is used when their efforts are complements. We also provide an implementation of the optimal contract, in which a primary component of the agents' compensation is a risky security. This implementation gives a theoretical justification for the wide-spread use of stock-based compensation by firms that rely on R&D.

Suggested Citation

  • Yaping Shan, 2013. "Incentives for Research Agents: Optimal Contracts and Implementation," School of Economics Working Papers 2013-20, University of Adelaide, School of Economics.
  • Handle: RePEc:adl:wpaper:2013-20
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    File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2013-20.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Dynamic Contract; Repeated Moral Hazard; Multi-agent Incentive; R&D; Employee Compensation;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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