Equilibrium Principal-Agent Contracts: Competition and R&D Incentives


  • We are grateful to Hongbin Cai, Jacques Cremer, Martin Cripps, Jeoren Hinloopen, Eugen Kovac, Daniel Krähmer, Matthias Kräkel, Konrad Mierendorff, Piergiovanna Natale, Patrick Rey, Urs Schweizer, and participants at seminars at the Peking University, University of Bonn, University of Amsterdam, and Cresse conference in Crete for discussions on the topic.


We analyze competition between firms engaged in R&D activities and market competition to study the choice of the incentive contracts for managers with hidden productivity. Oligopolistic screening requires extra effort/investment from the most productive managers: under additional assumptions on the hazard rate of the distribution of types we obtain no distortion in the middle rather than at the top. The equilibrium contracts are characterized by effort differentials between (any) two types always increasing with the number of firms, suggesting a positive relation between competition and high-powered incentives. An inverted U curve between competition and absolute investments can emerge for the most productive managers.