Balancing Incentives: the Tension between Basic and Applied Research

47 Pages Posted: 24 May 1999 Last revised: 22 May 2010

See all articles by Iain M. Cockburn

Iain M. Cockburn

Boston University Questrom School of Business; National Bureau of Economic Research (NBER)

Rebecca M. Henderson

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Scott Stern

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: January 1999

Abstract

This paper presents empirical evidence that the intensity of research workers' incentives for the distinct tasks of basic and applied research are positively associated with each other. We relate this finding to the prediction of the theoretical literature that when effort is multi-dimensional, firms will balance' the provision of incentives; when incentives are strong along one dimension, firms will set high-powered incentives for effort along other dimensions which compete for the worker's effort and attention (Holmstrom and Milgrom, 1991). We test for this effect in the context of pharmaceutical research using detailed data on individual research programs financed by private firms. Consistent with the complementarity hypothesis, we find strong evidence that firms who provide strong promotion-based incentives for individuals to invest in fundamental or basic' research also provide more intense incentives for success in applied research through the capital budgeting process. The intensity of these bonus' incentives is weaker in firms who use a more centralized research budgeting process. We interpret this latter finding as providing support for theories which emphasize substitutability between contractible and non-contractible signals of effort (Baker, Gibbons, and Murphy, 1994).

Suggested Citation

Cockburn, Iain M. and Henderson, Rebecca M. and Stern, Scott, Balancing Incentives: the Tension between Basic and Applied Research (January 1999). NBER Working Paper No. w6882, Available at SSRN: https://ssrn.com/abstract=147391

Iain M. Cockburn (Contact Author)

Boston University Questrom School of Business ( email )

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Boston, MA MA 02215
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National Bureau of Economic Research (NBER) ( email )

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Rebecca M. Henderson

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-543
Cambridge, MA 02142
United States
617-253-6618 (Phone)
617-253-2660 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Scott Stern

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Cambridge, MA 02142
United States
617-253-3053 (Phone)
617-253-2660 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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