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EQUILIBRIUM PRINCIPAL-AGENT CONTRACTS Competition and R&D Incentives

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  • Federico Etro
  • Michela Cella

Abstract

We analyze competition between firms engaged in R&D activities in the choice of incentive contracts for managers with hidden productivities. The equilibrium screening contracts require extra effort/investment from the most productive managers compared to the first best contracts: under additional assumptions on the hazard rate of the distribution of types we obtain no- distortion in the middle rather than at the top. Moreover, the equilibrium contracts are characterized by effort differentials between (any) two types that are always increasing with the number of firms, suggesting a positive re- lation between competition and high-powered incentives. An inverted-U curve between competition and absolute investments can emerge for the most pro- ductive managers, especially when entry is endogenous. These results persist when contracts are not observable, when they include quantity precommit- ments, and when products are imperfect substitutes.

Suggested Citation

  • Federico Etro & Michela Cella, 2010. "EQUILIBRIUM PRINCIPAL-AGENT CONTRACTS Competition and R&D Incentives," Working Papers 180, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
    • Handle: RePEc:mib:wpaper:180
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    References listed on IDEAS

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    Cited by:

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    2. Michela Cella & Federico Etro, 2016. "Contract competition between hierarchies, managerial compensation and imperfectly correlated shocks," Journal of Economics, Springer, vol. 118(3), pages 193-218, July.
    3. de Pinto, Marco & Goerke, Laszlo & Palermo, Alberto, 2023. "On the welfare effects of adverse selection in oligopolistic markets," Games and Economic Behavior, Elsevier, vol. 138(C), pages 22-41.
    4. Giovanna Bimonte & Maria Grazia Romano & Maria Russolillo, 2021. "Green Innovation and Competition: R&D Incentives in a Circular Economy," Games, MDPI, vol. 12(3), pages 1-14, September.
    5. Ennasri, Ahmed & Willinger, Marc, 2014. "Incentives and managerial effort under competitive pressure: An experiment," Research in Economics, Elsevier, vol. 68(4), pages 324-337.
    6. Michela Cella & Federico Etro, 2010. "Oligopolistic Screening and Two-way Distortion," Working Papers 2010_28, Department of Economics, University of Venice "Ca' Foscari".
    7. Mingxin Lin & Zuomin Wen, 2024. "Contractual Mechanisms in National Park Management: A Multi-Task Principal–Agent Model," Land, MDPI, vol. 13(7), pages 1-28, June.
    8. Maria G. Romano, 2021. "R&D incentives and competitive pressure under hidden information," Southern Economic Journal, John Wiley & Sons, vol. 88(1), pages 56-78, July.
    9. Lei Bao & Yulin Zhang & Vitor Miguel Ribeiro, 2018. "Observability of Incentive Contract and Platform Competition," Australian Economic Papers, Wiley Blackwell, vol. 57(2), pages 154-180, June.
    10. Lusheng Shao & Xiaole Wu & Fuqiang Zhang, 2020. "Sourcing Competition under Cost Uncertainty and Information Asymmetry," Production and Operations Management, Production and Operations Management Society, vol. 29(2), pages 447-461, February.
    11. Federico Etro, 2014. "Some thoughts on the Sutton approach," Journal of Economics, Springer, vol. 112(2), pages 99-113, June.

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    More about this item

    Keywords

    Principal-agent contracts; asymmetric information; endogenous market structures;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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