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We take a differential game approach to study the optimal choices of managerial firms concerning efforts in product a process innovation. We find the Nash equilibria under…
We take a differential game approach to study the optimal choices of managerial firms concerning efforts in product a process innovation. We find the Nash equilibria under the open-loop and closed-loop information structure, and we compare the steady state allocations with the corresponding equilibria of markets populated by standard profit-maximising firms. We find that the managerial incentive leads firm to underinvest in product differentiation and to overinvest in process innovation, as compared to standard profit-maximising firms.
R&D activities and incentives, together with the pace of the resulting technical progress, have been core issues ever since the pioneering work of Schumpeter (1942) and the consequent debate about the so-called Schumpeterian hypothesis, according to which the higher is the degree of market power enjoyed by a firm, the higher is her incentive to invest in innovation. This debate has received a crucial impulse by Arrow (1962), putting forward convincing argument against the Schumpeterian claim, by pointing out that a firm operating initially under perfect competition should indeed be endowed with the highest possible incentive to strive for an innovation whereby, if successful, she could throw her rivals out of the market and acquire monopoly power over the latter.
This paper considers a strategic delegation setting with R&D spillovers in a Cournot market. The game we analyze has four stages. First, owners have the option to hire a…
This paper considers a strategic delegation setting with R&D spillovers in a Cournot market. The game we analyze has four stages. First, owners have the option to hire a manager. If they decide to delegate, then in the contracting stage they have to determine the optimal incentives for the managers. In the R&D stage, the levels of investments in research and development are chosen which reduce production costs. Finally, in the production stage quantities offered on the market are selected. We characterize the sub-game perfect outcomes of this game depending on the level of R&D spillovers and derive the following main insights. First, in a case where no spillovers exist, both owners have the incentive to delegate R&D and production decisions to managers. This leads to higher outputs, higher R&D activities, but lower profits for the firms in comparison with an entrepreneurial (owner-managed) firm. These results still hold if the basic production unit costs are high, independent of the existence of spillovers. In these cases delegation leads to an increase in social welfare. Second, we demonstrate that when spillovers exist and basic unit production costs are low, then there are situations where owners delegate but discourage managers from being aggressive. This “soft” commitment leads to lower outputs, lower R&D, but higher profits for the firms in comparison with an entrepreneurial firm. Here, however, delegation results in lower welfare.
In this paper we take a close look at those strategic incentives arising in a situation where firms share the costs and profits in a multi-firm project, and bargain for…
In this paper we take a close look at those strategic incentives arising in a situation where firms share the costs and profits in a multi-firm project, and bargain for their respective (precommitted) split of cost- and profit-shares. We establish that, when each firm's effort contribution to the joint undertaking is mutually observable (which is often the case in closely collaborative operations) and hence can form basis of the contingent cost- and profit-sharing scheme, it is not the gross economic efficiency but the super-/sub-additivity of the nett returns from effort that directly affects the sustainability of a profile of firms' effort contributions. The (in)efficiency result we obtain in this paper is of different nature from so-called “free riding” or “team competition” problems: the set of sustainable outcomes with bargaining over precommitted cost- and profit-shares is generally neither a superset nor a subset of the sustainable set without bargaining.