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Managerial incentives for process innovation
Author(s) -
Overvest Bastiaan M.,
Veldman Jasper
Publication year - 2008
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/mde.1416
Subject(s) - incentive , observability , competition (biology) , industrial organization , verifiable secret sharing , product (mathematics) , process (computing) , business , microeconomics , product innovation , strategic complements , economics , product market , computer science , ecology , geometry , mathematics , set (abstract data type) , programming language , biology , operating system
Cost‐reducing investments by firms are often not publicly observable. This lack of observability would preclude a strategic use of process innovation. However, we show that an observable and verifiable contract that provides direct monetary incentives for cost reductions — an innovation incentive contract — can act as a strategic commitment device. Our model predicts that manager‐led firms are more innovative than owner‐led firms and that these contracts become less prevalent as product market competition intensifies. Both predictions are consistent with recent empirical evidence. Copyright © 2008 John Wiley & Sons, Ltd.