Premium
Equilibrium Principal‐Agent Contracts: Competition and R&D Incentives
Author(s) -
Etro Federico,
Cella Michela
Publication year - 2013
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12021
Subject(s) - incentive , oligopoly , competition (biology) , productivity , moral hazard , microeconomics , distortion (music) , distribution (mathematics) , investment (military) , economics , principal (computer security) , industrial organization , business , cournot competition , ecology , amplifier , mathematical analysis , mathematics , macroeconomics , cmos , electronic engineering , political science , law , computer science , engineering , biology , operating system , politics
We analyze competition between firms engaged in R&D activities and market competition to study the choice of the incentive contracts for managers with hidden productivity. Oligopolistic screening requires extra effort/investment from the most productive managers: under additional assumptions on the hazard rate of the distribution of types we obtain no distortion in the middle rather than at the top. The equilibrium contracts are characterized by effort differentials between (any) two types always increasing with the number of firms, suggesting a positive relation between competition and high‐powered incentives. An inverted U curve between competition and absolute investments can emerge for the most productive managers.