Why are Bad Products So Hard to Kill?

Abstract:     
It is puzzling that firms often knowingly continue to invest in product development projects even after receiving damning customer feedback. We argue that bad products are hard to kill because firms face an inherent conflict when designing managers’ incentives. Rewarding success encourages managers to forge ahead even when demand is low. To prevent managers from ignoring signs of low demand, the firm must also reward decisions to kill bad products. However, rewarding failure effectively undermines the rewards for success. The inability to resolve this tension forces the firm to choose between paying an even larger bonus for success or accepting continued investment in low-demand products. We explore the boundaries of this argument by evaluating different motivations for rewarding success, and comparing how the timing of demand information affects the outcome.

Keywords: product development, managerial incentives, moral hazard, adverse selection, information acquisition

JEL Classifications: D82, D86, L11, L23, M11, M31

Working Paper Series