Incentive contracts under product market competition and R&D spillovers

*Evangelia Chalioti
Athens University of Economics and Business

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     Last modified: February 3, 2011
     Presentation date: 03/13/2011 12:00 PM in NH 1120, Session A
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Abstract
This paper studies incentive contracting in a market with R&D spillovers and Cournot competition. It examines the effect of spillovers on contractual choices and addresses the question of whether the standard result that profits are higher under full information applies in this setting. Relative performance evaluation schemes are considered since R&D outputs are correlated due to spillovers. Spillovers amplify R&D and, in highly competitive industries, rivals enter into a rat race burning up profits by doing so. This paper argues that cost-savings by investing less in R&D due to risk-sharing may yield strategic benefits for the rivals. Delegation under asymmetric information can be used as a collusive device that diminishes the intensity of the race and the strategic interactions between firms making them better-off.

Appendices
      feedback mechanism in innovation process