Managerial incentives for process innovation

Bastiaan M. Overvest and Jasper Veldman
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Bastiaan M. Overvest: Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands, Postal: Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands
Jasper Veldman: Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands, Postal: Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands

Managerial and Decision Economics, 2008, vol. 29, issue 7, 539-545

Abstract: 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.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:29:y:2008:i:7:p:539-545

DOI: 10.1002/mde.1416

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