Incentive contracts under product market competition and R&D spillovers

Evangelia Chalioti ()

Economic Theory, 2015, vol. 58, issue 2, 305-328

Abstract: This paper studies cost-reducing R&D incentives in a principal-agent model with product market competition. It argues that moral hazard does not necessarily decrease firms’ profits in this setting. In highly competitive industries, firms are driven by business-stealing incentives and exert such high levels of R&D that they burn up their profits. In the presence of moral hazard, underprovision of R&D incentives due to risk sharing can generate considerable cost savings, implying higher profits for both rivals. This result indicates firms’ incentives to adopt collusive-like behavior in the R&D market. We also examine the agents’ contracts and the profits-risk relationship when cross-firm R&D spillovers occur. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Moral hazard; Process innovation; Cournot competition; R&D spillovers; Relative performance; D82; L13; O30 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:58:y:2015:i:2:p:305-328

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DOI: 10.1007/s00199-014-0811-5

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