R&D in a strategic delegation game

✍ Scribed by Jianbo Zhang; Zhentang Zhang

• Publisher: John Wiley and Sons
• Year: 1997
• Tongue: English
• Weight: 110 KB
• Volume: 18
• Category: Article
• ISSN: 0143-6570
• DOI: 10.1002/(sici)1099-1468(199708)18:5<391::aid-mde837>3.0.co;2-1

✦ Synopsis

This paper studies how a separation of ownership and management affects ®rms' R&D and production decisions in Cournot quantity competition. It is found that when R&D spillovers are small, owners strategically direct their managers away from pro®t maximization towards sales. Consequently, managerial ®rms invest more in R&D and have higher output and lower prices compared to their entrepreneurial counterparts. On the other hand, when spillovers are large, owners `penalize' managers for sales. In this case, managerial ®rms have lower R&D, lower output and higher prices. Nonetheless, managerial ®rms have lower pro®ts than their entrepreneurial counterparts regardless of spillovers. This paper also examines the welfare effects of a separation of ownership and management. It is found that in terms of ®rst-best social welfare, managerial ®rms are more (less) ef®cient than their entrepreneurial counterparts with low (high) spillovers. However, in terms of second-best social welfare, managerial ®rms are less ef®cient with all spillovers.