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Managerial incentives for process innovation

✍ Scribed by Bastiaan M. Overvest; Jasper Veldman

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
116 KB
Volume
29
Category
Article
ISSN
0143-6570

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✦ Synopsis

Abstract

Cost‐reducing investments by firms are often not publicly observable. This lack of observability would preclude a strategic use of process innovation. However, we show that an observable and verifiable contract that provides direct monetary incentives for cost reductions β€” an innovation incentive contract β€” can act as a strategic commitment device. Our model predicts that manager‐led firms are more innovative than owner‐led firms and that these contracts become less prevalent as product market competition intensifies. Both predictions are consistent with recent empirical evidence. Copyright Β© 2008 John Wiley & Sons, Ltd.

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