Why are Bad Products So Hard to Kill?
Management Science, Vol. 56, No. 7, pp. 1161-1179, July 2010
Posted: 23 Jan 2009 Last revised: 13 Jul 2010
Date Written: July 13, 2010
It is puzzling that firms often continue to invest in product development projects when they should know that demand will be low. 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 avoid investing in low-demand products, the firm must also reward decisions to kill products. However, rewarding managers for killing products 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 and accepting continued investment in low-demand products. We explore the boundaries of this argument by analyzing how the timing of demand information affects product investment decisions.
Keywords: product development, managerial incentives, moral hazard, adverse selection, information acquisition
JEL Classification: D82, D86, L11, L23, M11, M31
Suggested Citation: Suggested Citation