Knowledge Spillovers, Competition, and Taste for Science in a Model of R&D Incentive Provision

Abstract:     
This paper models the optimal provision of incentives to corporate scientists. We study how the incentive provision problem is affected by the competitive conditions in the product market, and by the degree of knowledge spillovers. The model considers scientific effort as multidimensional, and allows for scientists to have both monetary and non-monetary motivations. A number of novel results are obtained. First, knowledge spillovers lead firms to soften incentives in order not to benefit competitors, but only when product market competition is high. By contrast, greater knowledge spillovers positively affect the provision of incentives when competition is low. Second, the relationship between the intensity of competition and the power of incentives is U-shaped, and the region where the relationship is positive is smaller the higher the knowledge spillovers. Finally, the performance-contingent pay for both applied and basic research increases with non-pecuniary benefits scientists obtain from basic research, while a trade-off may exists between non-monetary rewards and the fixed component of the wage. These results provide a novel interpretation of some observed R&D organizational choices by companies, offer insights for the management of scientific and other creative workers, and have implications for public policy.

Keywords: Incentive Pay, Non-Monetary Motives, Knowledge Spillovers, Competition, Innovation

JEL Classifications: J32, L13, M12, M52, O31, O32

Working Paper Series