Technology Adoption and Optimal R&D under Moral Hazard

Abstract

Optimal R&D and technology adoption is modeled when an agency is present. Shareholders collectively acting as a board take decision about R&D investment. The outcome of R&D efforts is a new cost of production and it is a private information to the manager. Managers will have to expend some non-verifiable (and hence, non-contractible) costly effort to adopt a new technology. Whether or not agency problem is present, technologies having cost below a certain threshold are not adopted. Presence of the Moral Hazard problem reduces the range of technologies that is adopted. This in turn reduces the investment made in R&D.