Innovation and Corporate Conservatism

Abstract

In this paper, we study …rms’incentives to promote innovation. We analyze a situation in which an employee in a …rm can invest in discovering new ideas. An innovative employee has to decide whether to disclose his idea within the …rm, to maintain the status-quo by not implementing it, or to form a spin-out …rm. In a framework in which intellectual property rights are not perfect, a contract renegotiation may ensue following an internal disclosure. We show that …rms may have incentives to discourage both spin-out formation (fearing the increase in market competition generated by a new …rm) and internal disclosure (fearing the reshu­ ing of …rms’rents caused by an intra-…rm renegotiation). We consider several …rm policies, such as innovation bonuses or stock-based compensation, and show that while the former one always implements bargaining e¢ ciency, the latter one mitigates, but does not entirely deter, the …rm’s incentives to discourage innovation.