Individual Preferences, Organization, and Competition in a Model of R&D Incentive Provision

Abstract

Understanding the organization of R&D activities requires the simultaneous consideration of scientific workers' talent and tastes, companies' organizational choices, and the characteristics of the relevant industry, in particular the competitive pressure. We develop a model of the provision of incentives to corporate scientists, in an environment where (1) scientists engage in multiple activities when performing research; (2) knowledge is not perfectly appropriable; (3) scientists are responsive to both monetary and non-monetary incentives; and (4) firms compete on the product market. We show that the degree of knowledge spillovers and of market competition both affect the incentives given to scientists, and these effects interact. First, high knowledge spillovers lead firms to soften incentives when product market competition is high, and to strengthen incentives when competition is low. Second, the relationship between the intensity of competition and the power of incentives is U-shaped, with the exact shape depending on the degree of knowledge spillovers. We also show that the performance-contingent pay for both applied and basic research increases with the non-pecuniary benefits scientists obtain from research. We discuss the implications of our findings for empirical research as well as for management and public policy.

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

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