Optimal contracts for research agents. (7th February 2017)

• Record Type: Journal Article
• Authors: Shan, Yaping
• Is Part Of: Rand journal of economics. Volume 48:Number 1(2017:Spring)
• Page Start: 94
• Page End: 124
• Publication Date: 2017-02-07
• Subjects: Industrial organization (Economic theory) -- Periodicals; Microeconomics -- Periodicals; Services publics -- Périodiques; Économie industrielle -- Périodiques; Microéconomie -- Périodiques; 338.6
• DOI: 10.1111/1756-2171.12169
• Languages: English
• ISSNs: 0741-6261

Abstract

Abstract : We study the agency problem between a firm and its research employees under several scenarios characterized by different Research and Development (R&D) unit setups. In a multiagent dynamic contracting setting, we describe the precise pattern of the optimal contract. We illustrate that the optimal incentive regime is a function of how agents' efforts interact with one another: relative performance evaluation is used when their efforts are substitutes, whereas joint performance evaluation is used when their efforts are complements. The optimal contract pattern provides a theoretical justification for the compensation policies used by firms that rely on R&D.