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Managing innovation: Optimal incentive contracts for delegated R&D with double moral hazard

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  • Poblete, Joaquín
  • Spulber, Daniel

Abstract

Managing innovation involves double moral hazard because the principal delegates R&D to a specialized agent and then makes decisions to apply the resulting invention. Double moral hazard is significant because innovation by the principal implies that the optimal incentive contract satisfies monotonicity conditions. The analysis shows that the optimal incentive contract for delegated R&D is an option. Delegated R&D with simultaneous sampling results in shirking but delegated R&D with sequential sampling attains the efficient outcome. The analysis considers a combined problem with simultaneous and sequential search and gives sufficient conditions under which delegated R&D attains the first best. The discussion also considers delegated R&D with stochastic innovation and with stochastic quality of inventions.

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  • Poblete, Joaquín & Spulber, Daniel, 2017. "Managing innovation: Optimal incentive contracts for delegated R&D with double moral hazard," European Economic Review, Elsevier, vol. 95(C), pages 38-61.
    • Handle: RePEc:eee:eecrev:v:95:y:2017:i:c:p:38-61
    DOI: 10.1016/j.euroecorev.2017.03.004
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    3. Bhattacharjee, Swagata, 2022. "Dynamic contracting for innovation under ambiguity," Games and Economic Behavior, Elsevier, vol. 132(C), pages 534-552.
    4. Abdol Majid Saadat Nezhad & Tahmoures Sohrabi & Nasrollah Shadnoosh & Abbas Toloie Eshlaghy, 2017. "A New Approach to Challenges of Venture Capital in Financing the Industrial Clusters through Cooperative Models and Venture Funds in Iran," International Journal of Economics and Financial Issues, Econjournals, vol. 7(6), pages 111-119.
    5. Yunjuan Liang & Xin Liang & Hua Wei, 2023. "Sustainable Quality-Incentive Contract Design of Public Technology Innovation Procurement under Asymmetry Information," Sustainability, MDPI, vol. 15(11), pages 1-22, May.
    6. Ni, Jian & Xu, Yue & Shi, Jia & Li, Jiali, 2024. "Product innovation in a supply chain with information asymmetry: Is more private information always worse?," European Journal of Operational Research, Elsevier, vol. 314(1), pages 229-240.
    7. Congli Su & Mingxi Wang, 2022. "Quality incentive contract design in government procurement for innovation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 3665-3684, December.
    8. Joosung Lee & Daniel Li, 2022. "Sequential Search With Adaptive Intensity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 803-829, May.

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    More about this item

    Keywords

    R&D; Invention; Innovation; Contract; Principal; Agent; Incentives;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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