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Managerial Incentives, Innovation and Product Market Competition

Discussion Papers 295, 20 S.

Zhentang Zhang

2002. Aug.

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This paper investigates the strategic value of the managerial incentive scheme in affecting firms' incentive in R&D investment and their product market activities. Firstly, we find that in Cournot-quantity competition, owners strategically assign a non-profitmaximization objective to their managers. Consequently, managers in a delegation game invest more in cost-reducing R&D, and have higher output, lower prices and lower profits, as compared to profit-maximizers in a owner-run game. Secondly, we find that R&D collusion induces owners in a delegation game to choose more aggressive managerial incentives as compared to R&D competition, which in turn leads to increased R&D investment, reduced product prices and increased profits.

JEL-Classification: C72;D20;L22;O32
Keywords: Strategic Delegation, Managerial Incentives, R&D competition and R&D collusion.
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