Incentives and Innovation: A Multitasking Approach

Abstract

This paper develops a multitask model where employees make choices between their assigned standard tasks, for which the firm has a performance measure and provides incentives, and privately observed innovation opportunities that fall outside of the performance metrics, and require ex post bargaining. If innovations are highly firm specific, firms provide lower-powered incentives for standard tasks to encourage more innovation, yet in equilibrium employees undertake too few innovations. The opposite occurs if innovations are less firm specific. We also investigate the effectiveness of several possibilities to encourage innovation, such as tolerance for failure, stock-based compensation, and the allocation of intellectual property rights. (JEL D21, J33, M12, O31, O34)

The adoption and termination of profit sharing for employees: does management’s attitude play a role?

“…The nature of production is captured by variables for the share of university graduates, a research-based strategy, a modern production technology and a participative organization of work. The literature on skillbiased technological and organizational change suggests that these variables reflect more multifaceted and complex tasks (Acemoglu 2002, Caroli and Van Reenen 2001, Hellmann and Thiele 2011, Jirjahn and Kraft 2011. A dummy for the use of shift work is also included.…”

Taxation and Incentives to Innovate: A Principal-Agent Approach

“…This can be the case with R&D workers and managers when the innovation process relies upon exploration of new approaches and directions (Manso 2011), or when there is a tension between application of known practices versus exploitation of new opportunities (Hellmann and Thiele 2011). In such cases the principal can provide the "right" set of incentives to the agent by means of contracts made of a mix of fixed pay, variable pay linked to some observable individual measure, and variable pay tied to the overall performance of the firm.…”

“…The underlying structure of the model is based on the work of Hellmann and Thiele (2011): the agent is assumed to be able to invest effort in two competing tasks, where one is a standard task, and the other is a task that can produce an innovation. The principal is unable to directly observe the agent's levels of effort.…”

“…The following model is based on the work by Hellmann and Thiele (2011). We extend and modify the original principal-agent model in two ways.…”

“…We extend and modify the original principal-agent model in two ways. In Hellmann and Thiele (2011) the division of the innovation value between the principal and the agent was assumed to be exogenous and stemming from different degrees of appropriability of the innovation value. In our model, on the contrary, we consider two distinct variable pay schemes that the principal can use in order to drive the agent's effort investments and which endogenously determine how the value of the innovation is divided.…”