Incentives For Firms Research Articles

Optimal Taxation and R&D Policies

We study the optimal design of corporate taxation and R&D policies as a dynamic mechanism design problem with spillovers. Firms have heterogeneous research productivity, and that research productivity is private information. There are non‐internalized technological spillovers across firms, but the asymmetric information prevents the government from correcting them in the first best way. We highlight that key parameters for the optimal policies are (i) the relative complementarities between observable R&D investments, unobservable R&D inputs, and firm research productivity, (ii) the dispersion and persistence of firms' research productivities, and (iii) the magnitude of technological spillovers across firms. We estimate our model using firm‐level data matched to patent data and quantify the optimal policies. In the data, high research productivity firms get disproportionately higher returns to R&D investments than lower productivity firms. Very simple innovation policies, such as linear corporate taxes combined with a nonlinear R&D subsidy—which provides lower marginal subsidies at higher R&D levels—can do almost as well as the unrestricted optimal policies. Our formulas and theoretical and numerical methods are more broadly applicable to the provision of firm incentives in dynamic settings with asymmetric information and spillovers, and to firm taxation more generally.

Flourish or Perish? The Impact of Technological Acquisitions on Contributions to Open-Source Software

Flourish or Perish? The Impact of Technological Acquisitions on Contributions to Open-Source Software This study examines how acquisitions of open-source software (OSS) firms may impact the internal and external contributors to the OSS projects of acquisition targets. We find that, for target firms, acquisitions hurt internal contributions from their employees to their OSS projects but attract more external contributions from outside developers. Therefore, managers of merged entities should strive to maintain the incentives of target firms’ internal developers after acquisitions, and they can also leverage acquisitions to attract external developers. We also find that acquirers with prior OSS experiences and similar OSS projects with target firms are in an advantageous position to attract contributions from both target firms’ internal developers and external developers in the OSS community. In this regard, managers of acquirers can consider building their OSS experiences and selecting appropriate target firms before acquisitions. Moreover, our study suggests that acquisitions of OSS firms can also benefit the whole OSS community by motivating the contributions of internal and external developers to other projects in the community. Therefore, for both practitioners and policy makers, acquisitions should have important implications for nourishing the entire OSS community.

Stranded Assets: How Policy Uncertainty affects Capital, Growth, and the Environment

The paper considers stochastic environmental policy and its effects on the environment, portfolio composition, and economic growth. Capital accumulation causes pollution which is reduced by private green services and public abatement. The government subsidizes green services and taxes dirty capital albeit at a rate which may become random, causing unexpected capital write-offs. Tax jumps depend on natural degradation and environmental activism. We derive how uncertainty and political activism affect the risk premia for investors. We analyze the incentives for firms to increase the greenness of production in order to reduce political uncertainty. Stochastic taxation is shown to act as a substitute for green subsidies when uncertainty decreases in the ratio of green services to capital and agents use their green activities strategically. Tax uncertainty may trigger precautionary savings, causing additional growth and enhanced environmental deterioration.

Intra-industry agglomeration and the external economies of scale model: empirical evidence from Colombia

ABSTRACT This paper provides an economic model of localization economies under intra-industry agglomeration. When firms in an industry experience diseconomies of scale and homogeneous goods agglomerate, external economies of scale emerge, creating incentives for competitive firms to agglomerate. This study tests this model on the Colombian basic-plastics industry, using a dynamic panel regression for the period 1995–2015. Data analyses of 195 firms using an agglomerate index revealed the total cost declines by 0.031% as the agglomeration index increases marginally by 1.0%. These findings are beneficial to economic policymakers working to achieve agglomerations in other economic sectors through, for example, free-trade zones.

Political turnover and corporate research and development: evidence from China

ABSTRACT This paper documents cycles in corporate research and development corresponding with the timing of political turnover. Utilising the data on local government officials and research and development activities at the firm level in China, firms’ intensity of research and development input is found to be negatively associated with a turnover in local political leaders. We investigate several potential explanations and find evidence supporting that political turnover reduces the incentives of firms to invest in research and development until the uncertainty is resolved.

Non-GAAP measure disclosure and insider trading incentives in high-tech IPO firms

PurposeThis paper aims to investigate whether the non-generally accepted accounting principles (GAAP) performance measures (NGMs) disclosure by high-tech initial public offering (IPO) firms signal firms’ efforts to maintain relatively high stock price levels before the expiration of the lock-up period to benefit insider selling.Design/methodology/approachThe authors perform ordinary least squares and logit regressions using financial statement data and hand collected data on NGM disclosures for high-tech firms during the IPO process.FindingsThe authors find that the top executives of high-tech IPO firms with NGM disclosures are significantly more likely to sell and sell significantly more insider shares at the lock-up expiration than those of high-tech IPO firms without NGM disclosures. At the same time, while high-tech NGM firms have stock returns similar to their counterparts without NGMs for the period before the lock-up expiration, their stock returns are substantially lower after insider selling following the lock-up expiration.Practical implicationsBy documenting the negative association between NGM disclosures and post-lockup expiration stock performance, the study highlights managerial deliberate optimism about the firm’s prospects which may not materialize. Hence, investors should take the NGM disclosures with a grain of salt.Originality/valueThis paper fills a notable void in the non-GAAP reporting literature by documenting a statistically and economically significant positive association between managerial equity trading incentives and NGM disclosures by high-tech IPO firms.

Why are distressed firms acquisitive?

Acquisitions made by distressed firms are economically important. This paper explores the rationale behind such acquisitions in a quasi-natural experiment and identifies the causal link between bankruptcy risk and acquisitions. Upon an exogenous reduction in bankruptcy risk, distressed firms react by cutting 46% of cash spending on acquisitions, announcing fewer deals, and borrowing less for acquisition-related activities. The evidence suggests that distressed firms make acquisitions to diversify bankruptcy risk. These findings demonstrate a new effect of financial distress on firm investment—the pressure to meet debt obligations creates an incentive for firms to diversify through acquisitions.

Sharing Manufacturer’s Demand Information in a Supply Chain with Price and Service Effort Competition

Problem definition: This paper investigates the issue of sharing the private demand information of a manufacturer that sells a product to retailers competing on prices and service efforts. Academic/practical relevance: In the existing literature, which ignores service effort competition, it is known that demand signaling induces an informed manufacturer to distort the wholesale price downward, which benefits the retailers, and so, they do not have any incentive to receive the manufacturer’s private information. In practice, many manufacturers share demand information with their retailers that compete on prices and service efforts (e.g., demand-enhancing retail activities), a setting that has not received much attention from the literature. Methodology: We develop a game-theoretic model with one manufacturer selling to two competing retailers and solve for the equilibrium of the game. Results: We show how an informed manufacturer may distort the wholesale price upward or downward to signal demand information to the retailers, depending on the cost of service effort, the intensity of effort competition, and the number of uninformed retailers. We fully characterize the impact of such wholesale price distortion on the firms’ incentive to share information and derive the conditions under which the manufacturer shares information with none, one, or both of the retailers. We derive conditions under which a higher cost of service effort makes the retailers or the manufacturer better off. Managerial implications: Our results provide novel insights about how service effort competition impacts the incentives for firms in a supply chain to share a manufacturer’s private demand information. For instance, when the cost of effort is high or service effort competition is intense, a manufacturer should share information with none or some, but not all, of the retailers.

Maturity mismatches of Chinese listed firms

Maturity mismatches in the financial sector have been extensively examined, but those in non-financial sectors have been largely overlooked. We explore why Chinese listed firms have a high short-term debt ratio from the perspective of asset-debt maturity mismatches, which involve firms using short-term debts to support their long-term investments. We investigate whether the maturity mismatch is actively or passively adopted by Chinese listed firms by analyzing the effect of financial constraints on maturity mismatches. We find that the mismatching behavior is more pronounced for firms with fewer financial constraints, supporting our active mismatch view. Reducing the cost of debt acts as an incentive for firms to actively adopt maturity mismatches. Our study thus identifies one reason for high short-term debt ratios in emerging markets.

Interventions to promote technology adoption in firms: A systematic review.

Interventions to promote technology adoption in firms: A systematic review.

Innovation Incentives in the Pharmaceutical Sector: Rethinking Competition and Public Policy?

The incentives of pharmaceutical companies to innovate and how competition affects these incentives has been topical in recent years: for the general public, as evidenced by a patent race at an unprecedented pace during the ongoing Coronavirus disease 2019 (COVID-19) pandemic; and more specifically for competition authorities, as demonstrated for example by the role innovation played in the assessment of the Bayer/Monsanto (2018), Dow/DuPont (2017), and the Novartis/GSK (2015) mergers. This article contributes to the innovation debate, notably in the pharmaceutical industry, by giving an overview on firm and market-level incentives to carry out research and development (R&D). Understanding these innovation incentives is relevant for a proper competition assessment where the effect of a particular conduct or structural change on these incentives is considered, but also more generally in the context of public policy or regulatory questions. We review the fundamental elements driving innovation incentives and tentatively relate these to the development of new drugs for neurodegenerative diseases (NDD), in particular Parkinson’s disease (PD) and Alzheimer’s disease (AD). Health Economics, Pharmaceutical Products, Innovation, R&D, Information Asymmetry, Coase Conjecture, Replacement Effect, Patent Race, Neurodegenerative Diseases, Parkinson’s Disease, Alzheimer’s Disease

Organization capital, tournament incentives and firm performance

This paper examines the relationship between organization capital and promotion-based tournament incentives. Using a sample of 33,618 publicly listed U.S. firm-year observations covering 1992–2020, the results show that firms with high levels of organization capital have relatively more promotion-based tournament incentives, and that tournament incentives in high organization capital firms improve firm value and operating performance.

Do data breaches damage reputation? Evidence from 45 companies between 2002 and 2018

AbstractWhile data breaches have become more common, there is little evidence that companies that incur them experience a persistent decline in financial performance or security prices. Using new firm-level data between 2002 and 2018, this paper finds that firms experience a 26–29% increase in reputational intangible capital following an average data breach. However, the largest and most salient breaches are associated with a 5–9% decline in reputational intangible capital following a data breach. These effects are concentrated among firms in consumer-facing industries: smaller (larger) data breaches are associated with more positive (negative) effects. These results suggest that current regulatory guidance may not provide complete incentives for firms to invest in cybersecurity capabilities, particularly for small- to medium-sized breaches.

Dynamic Coopetition Strategies: The Impacts of Ex ante and Ex post Heterogeneities

The paper studies dynamic strategies of heterogeneous firms cooperating with competitors. We consider firms’ ex ante heterogeneity and ex post heterogeneity in a two-period, two-player game theoretical model. Firstly, we focus on ex ante heterogeneity, i.e., asymmetric initial characteristics of firms, which results in unequal distribution of the synergistic value created through cooperation. And we take ex post heterogeneity, especially referred to learning effects, and the incentives of firms into account. Both ex ante and ex post heterogeneities help us figure out optimal coopetition strategies of firms, via investigating their coopetition game. Secondly, we introduce external value creation promoted by competition, and external value capture derived from cooperation into our model to study their single and interactive effects on coopetition incentives of each firm. The analyses enrich the dichotomy imposed in literature between “cooperation - value creation” and “competition - value capture” by providing a unified interaction perspective between cooperation, competition, value creation as well as value capture. Our model attempts to explain why and how would different types of firms cooperate with their competitors in a dynamic context.

Interfaces, Modularity and Ecosystem Emergence: How DARPA Modularized the Semiconductor Ecosystem

Scholars have identified the pivotal role that modularity plays in creating innovation ecosystems—complex arrangements of buyers, suppliers, and complementors. In large part, this is due to modularity’s effect on industry structure, breaking up the value chain along interfaces, thus allowing specialized firms to enter, compete, and innovate. Less well-understood is where modularity comes from. While modularity theory is heavily influenced by the information technology sector, other industries (such as automobiles) suggest a potential conflict between firm incentives and the creation of modular interfaces. We demonstrate the role for government funding in generating modularity using an historical case study of the semiconductor industry and shifts in industry structure enabled by public R&D funding in the 1970s. We argue that this funding was mission-oriented with an interest in changing the semiconductor industry structure from a vertically-integrated oligopoly to a competitive, de-integrated industry. A subsequent shift, to an ecosystem encompassing an ever-expanding variety of customer industries, further increases the long-term economic value of modularity-as-policy.

What Makes the Jobs of Tomorrow? The “What” and “Why” of Labor Outcomes from Technological Change

The theme of this symposium is the labor outcomes of technological change, and the mechanisms by which these outcomes are generated. The four papers presented address questions of skill and occupational demand effects of technological change, as well as changes in worker experience and participation. The papers cover different forms of technological change representing a diversity of possible impacts, from automation in manufacturing and elsewhere, to digital technology to changes in product design. Each paper uses different scopes and methods of analysis, from the firm level to economy-wide, to identify key phenomena of labor outcomes and uncover their origins. Together, these papers present a holistic view of technological change affecting labor outcomes through 1) firm institutions and choices of institutional development, 2) inclusion of workers as stakeholders in technology development and implementation, 3) the dissemination and adoption of technologies over time, and 4) altering the decision space and process organization incentives of firms. In keeping with the theme of “what” and “why” this symposium both presents valuable findings about ongoing changes in labor demand and worker experience and offers insights into why these effects may occur, providing tools for the development of organizational responses and policy targeted at technological change. The work presented by Combemale draws on insights from operations research, engineering, and psychology to construct and test a formal model of how firm choices around the division of labor generate skill demand, developing a taxonomy of how technological change in turn affects skill demand by altering the problem of the firms. Emphasizing occupational changes including reskilling or possible displacement, the work presented by Steffen uses a near-universe of US online job postings at different points in time to trace of aggregate outcomes for occupational skill content, wages and demand and a linkage of these outcomes to areas of technological exposure. Myers presents work with a focus on the participation of workers in innovation and mechanisms for the inclusion of workers’ interests in technological development through value-selling by developments in four long term projects. Focusing on the role of workers in innovation, productivity gains from technological change and the influence of firm-level and regional contexts, the work presented by Waldman-Brown approaches labor outcomes of technological change from an institutional perspective, using a comparative analysis of highly similar manufacturing plants in different countries as they implement a suite of automation technologies. How It’s Made: A General Theory of the Labor Implications of Technological Change Presenter: Laurence Ales; Carnegie Mellon U. - Tepper School of Business Presenter: Christophe Combemale; Engineering & Public Policy (EPP), Carnegie Mellon U. Presenter: Erica R.H. Fuchs; Carnegie Mellon U. Presenter: Kate S. Whitefoot; Engineering & Public Policy (EPP), Carnegie Mellon U. Whose Interest Is It? Worker Value Selling for Stakeholder Representation in Technology Development Presenter: Jenna E. Myers; MIT Sloan School of Management The Role of Manufacturing Institutions in Inclusive Innovation: A Cross-National Case Study Presenter: Anna Waldman-Brown; Massachusetts Institute of Technology Occupational Change: Automation and Reskilling Risks Presenter: Sebastian Steffen; - Presenter: Erik Brynjolfsson; Stanford U.

Educational Level of Researchers in R&D Institutes and External Technology Acquisition

Firms have increasingly sourced knowledge beyond their boundaries. External technologies complement firms’ internal knowledge stock with multiple benefits, but these benefits come with considerable economic and cognitive costs. Thus, the incentive of firms to source external technologies relies on the trade-off between its benefits and costs. Our study aims to explore how the educational level of researchers in research and development (R&D) institutes held by firms influences external technology acquisition. We argue that a higher educational level of researchers in R&D institutes helps reduce costs and capture value from external technologies, thus promoting firms to acquire technologies externally. Furthermore, the positive effect of the educational level of researchers in R&D institutes will be amplified when faced with high task intensity or intense market competition. By contrast, the effect will be weakened when the industry R&D intensity is high or when the technology transaction norms are strong. Using the unique data of manufacturing firms in an eastern province of China, we validate our theoretical framework empirically and offer several managerial and policy implications.

Economic policy uncertainty and firm performance: evidence from China

This paper analyzes the impact of economic policy uncertainty on firm performance. Utilizing a news-based index of economic policy uncertainty and firm-level data in China, firm investment, employment, and revenue are found to be negatively associated with policy-related economic uncertainty. This negative relationship is weakened in state-owned enterprises (a fall in investment of 5.61%, employment growth of 0.09%, and sales growth of 0.31%) compared to that of non-state-owned enterprises (a fall in investment of 7.79%, employment growth of 0.14%, and sales growth of 0.34%). We explore several potential explanations and find evidence supporting that economic policy uncertainty reduces the incentives of firms to expand their operation through the mechanism of risk-taking, cash holdings and tax burden. Given this microscopic study on mechanisms, our analysis provides a reference for policy-makers to effectively reduce economic fluctuations.

Do Data Breaches Damage Reputation? Evidence from 45 Companies Between 2002 and 2018

While data breaches have become more common, there is little evidence that companies that incur them experience a persistent decline in financial performance or security prices. Using new firm-level data between 2002 and 2018, this paper finds that firms experience a 26-29% increase in intangible capital following an average data breach. However, the largest and most salient breaches are associated with a 5-9% decline in intangible capital following a data breach. These effects are concentrated among firms in consumer-facing industries: smaller (larger) data breaches are associated with more positive (negative) effects on intangible capital. These results suggest that current regulatory guidance may not provide complete incentives for firms to invest in cybersecurity capabilities, particularly for small to medium size breaches.

The Political Economy of Rent-Seeking: Evidence from Spain’s Support Policies for Renewable Energy

This paper provides a theoretical framework to explore how the support policies for renewable energies can promote rent-seeking incentives in private firms. We develop a political economy of rent-seeking that considers the link between the regulatory decisions of political agents and the potential scope of socially wasteful pursuits. We argue that systematic public support schemes bring rent-seeking as a perception shared by entrepreneurs that influencing political allocations of resources is an essential and potentially preferable source of private profit than other for-profit economic avenues. As evidence of our claims, the framework is applied to the case of Spain to illustrate the economic effects of support policies on the production and distribution of renewable energy. We find rent-seeking behavior in Spain’s renewable energy industry, and precisely that: (i) political regulations have induced market concentration and rent-seeking in renewable energy firms, (ii) these firms have required increasing regulations and premiums to survive, and (iii) energy consumers are forced to pay rent-seeking through increasingly expensive electricity bills. The analysis reveals some challenges and opportunities to drive efficient market-based policies to strengthen entrepreneurial competition and curb rent-seeking behavior. These insights have relevant proposals for the Spanish energy industry in complying with the EU Green Deal through a sustainable transition and comprehensive growth.