Managerial Delegation, Product R&D and Subsidies on R&D Investment Costs

Chou Chung-Hui ()
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Chou Chung-Hui: Department of Finance, I-Shou University, Kaohsiung City 84001, Taiwan

The B.E. Journal of Economic Analysis & Policy, 2023, vol. 23, issue 1, 55-78

Abstract: This paper studies owners’ optimal designs of incentive schemes in a market with managerial firms competing in prices as well as in product research and development (R&D) investment in which owners use a linear combination of gross profits which are defined to be sales revenue minus production costs, sales revenue and R&D costs to evaluate managers’ performances. The main contribution of our research is showing that owners not only deflate R&D costs to induce managers to invest more in product R&D but also place different weights on production costs and R&D costs optimally. If product R&D is highly efficient, managerial delegation improves consumers’ surplus at cost of firms’ profits which is sharply contrasting to the standard conclusion of sales delegation under price competition. Moreover, managerial delegation may achieve Pareto efficiency if product R&D is mildly inefficient. Finally, we find that copyright protection benefits consumers’ surplus but could reduce social welfare.

Keywords: research and development; quality; managerial delegation; spillover (search for similar items in EconPapers)
JEL-codes: D43 L15 L20 O31 O32 O34 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/bejeap-2021-0402

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