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R&D in a strategic delegation game
Author(s) -
Zhang Jianbo,
Zhang Zhentang
Publication year - 1997
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/(sici)1099-1468(199708)18:5<391::aid-mde837>3.0.co;2-1
Subject(s) - cournot competition , microeconomics , welfare , profit maximization , economics , competition (biology) , delegation , profit (economics) , maximization , social welfare , production (economics) , business , industrial organization , market economy , management , ecology , political science , law , biology
This paper studies how a separation of ownership and management affects firms' R&D and production decisions in Cournot quantity competition. It is found that when R&D spillovers are small, owners strategically direct their managers away from profit maximization towards sales. Consequently, managerial firms invest more in R&D and have higher output and lower prices compared to their entrepreneurial counterparts. On the other hand, when spillovers are large, owners ‘penalize’ managers for sales. In this case, managerial firms have lower R&D, lower output and higher prices. Nonetheless, managerial firms have lower profits than their entrepreneurial counterparts regardless of spillovers. This paper also examines the welfare effects of a separation of ownership and management. It is found that in terms of first‐best social welfare, managerial firms are more (less) efficient than their entrepreneurial counterparts with low (high) spillovers. However, in terms of second‐best social welfare, managerial firms are less efficient with all spillovers. © 1997 John Wiley & Sons, Ltd.