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Managerial Delegation, Product R&D and Subsidies on R&D Investment Costs

Managerial Delegation, Product R&D and Subsidies on R&D Investment Costs AbstractThis paper studies owners’ optimal designs of incentive schemes in a market with managerial firms competing in prices as well as in product research and development (R&D) investment in which owners use a linear combination of gross profits which are defined to be sales revenue minus production costs, sales revenue and R&D costs to evaluate managers’ performances. The main contribution of our research is showing that owners not only deflate R&D costs to induce managers to invest more in product R&D but also place different weights on production costs and R&D costs optimally. If product R&D is highly efficient, managerial delegation improves consumers’ surplus at cost of firms’ profits which is sharply contrasting to the standard conclusion of sales delegation under price competition. Moreover, managerial delegation may achieve Pareto efficiency if product R&D is mildly inefficient. Finally, we find that copyright protection benefits consumers’ surplus but could reduce social welfare. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The B.E. Journal of Economic Analysis & Policy de Gruyter

Managerial Delegation, Product R&D and Subsidies on R&D Investment Costs

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Publisher
de Gruyter
Copyright
© 2022 Walter de Gruyter GmbH, Berlin/Boston
ISSN
1935-1682
eISSN
1935-1682
DOI
10.1515/bejeap-2021-0402
Publisher site
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Abstract

AbstractThis paper studies owners’ optimal designs of incentive schemes in a market with managerial firms competing in prices as well as in product research and development (R&D) investment in which owners use a linear combination of gross profits which are defined to be sales revenue minus production costs, sales revenue and R&D costs to evaluate managers’ performances. The main contribution of our research is showing that owners not only deflate R&D costs to induce managers to invest more in product R&D but also place different weights on production costs and R&D costs optimally. If product R&D is highly efficient, managerial delegation improves consumers’ surplus at cost of firms’ profits which is sharply contrasting to the standard conclusion of sales delegation under price competition. Moreover, managerial delegation may achieve Pareto efficiency if product R&D is mildly inefficient. Finally, we find that copyright protection benefits consumers’ surplus but could reduce social welfare.

Journal

The B.E. Journal of Economic Analysis & Policy – de Gruyter

Published: Jan 1, 2023

Keywords: research and development; quality; managerial delegation; spillover; D43; L15; L20; O31; O32; O34

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