60 Pages Posted: 6 Sep 2016 Last revised: 13 Aug 2017
Date Written: July 8, 2017
This paper examines impacts of different types of agency frictions in motivating innovation. I exploit a difference-in-differences strategy using the 2003 Dividend Tax Cut, which increased after-tax managerial ownership, thus either provided incentives to forgo private benefit or exacerbated managerial risk aversion in different firms. I find that aligning incentives stimulates the quantity of innovation input and output. Aggravated managerial risk aversion impedes innovation quantity and also shifts innovation to safer and more incremental directions. Firms adjust innovative labor and their organizational structures to achieve these changes. Agency frictions in motivating innovation are mitigated by governance, compensation, and competition.
Keywords: Incentives, Risks, Motivating Innovation, Compensation, Taxation
JEL Classification: G31, G34, H25, J30, O31
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