EQUILIBRIUM PRINCIPAL-AGENT CONTRACTS Competition and R&D Incentives

Federico Etro () and Michela Cella ()

No 180, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We analyze competition between firms engaged in R&D activities in the choice of incentive contracts for managers with hidden productivities. The equilibrium screening contracts require extra effort/investment from the most productive managers compared to the first best contracts: under additional assumptions on the hazard rate of the distribution of types we obtain no- distortion in the middle rather than at the top. Moreover, the equilibrium contracts are characterized by effort differentials between (any) two types that are always increasing with the number of firms, suggesting a positive re- lation between competition and high-powered incentives. An inverted-U curve between competition and absolute investments can emerge for the most pro- ductive managers, especially when entry is endogenous. These results persist when contracts are not observable, when they include quantity precommit- ments, and when products are imperfect substitutes.

Keywords: Principal-agent contracts; asymmetric information; endogenous market structures (search for similar items in EconPapers)
JEL-codes: D82 D86 L13 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010-03, Revised 2010-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-ino and nep-tid
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Equilibrium Principal‐Agent Contracts: Competition and R&D Incentives (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:180

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