Agency Costs and Innovation

Bengt Holmstrom

No 214, Working Paper Series from Research Institute of Industrial Economics

Abstract: Stylized facts indicate that small firms are responsible for a disproportionate share of innovative research. There are many possible explanations for this facto The paper seeks to understand this phenomena as the outcome of an optimal assignment of tasks across individuals and organizations. It is shown that incentive costs associated with a given task depend on the total portfolio of tasks that an individual or an organization undertakes. Mixing, hard to measure activities (innovation) with easy to measure activities (routine) is particularly costly, since it will either lead to misallocation of attention across tasks or to misallocation of risk. Larger firms are at a comparative disadvantage in conducting highly innovative research, because of the costs associated with managing a heterogeneous set of tasks. It is further argued that optimal organizational responses to coordination and control of routine tasks will lead to bureaucratization within the firm and to financial constraints imposed by capital markets, both of which are hostile to innovation.

Keywords: Innovation; agency costs; efficient allocation; routine (search for similar items in EconPapers)
JEL-codes: L22 O32 (search for similar items in EconPapers)
Pages: 40 pages
Date: 1989-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (502)

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Journal Article: Agency costs and innovation (1989)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:0214

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