The Incentives for Innovative Activity in the Managerial Firm
Article first published online: 29 JAN 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Managerial and Decision Economics
Volume 34, Issue 6, pages 397–408, September 2013
How to Cite
Kraft, K. (2013), The Incentives for Innovative Activity in the Managerial Firm. Manage. Decis. Econ., 34: 397–408. doi: 10.1002/mde.2599
- Issue published online: 4 JUL 2013
- Article first published online: 29 JAN 2013
- Manuscript Accepted: 28 NOV 2012
- Manuscript Received: 9 AUG 2012
This paper discusses the incentives for innovation by a manager-led firm. In particular, it is investigated how remuneration practices influence the choice of a risky project. In the first place, a dynamic model with uncertainty is used to determine the optimal employment level with exogenous growth and risk. In the second part of the paper, growth and risk are explained by R&D expenditures. Optimal investment expenditures for R&D are derived for (i) the profit-maximizing firm and (ii) the managerial firm, where the manager receives a fixed salary as well as a variable share of profits. If risk neutrality is assumed, then no difference exists. However, if risk aversion is considered, the managerial firm will invest more into R&D than the owner-led company. Size-related salaries are an additional reason for higher expenditures of R&D by managers. Copyright © 2013 John Wiley & Sons, Ltd.