Incentives For Firms Research Articles

Technological cooperation or competition? optimal strategies of incumbent and entrant in ICT markets

This study examines the patterns of technological cooperation or technological competition between an incumbent firm and an entrant firm in Information and Communications Technology (ICT) markets. The incumbent firm in ICT markets often licenses its key technology to a new entrant, who is usually the rival to the incumbent and has the option to enter the market early through licensing in the technology (i.e., technological cooperation), or to delay its entry for producing a higher quality product through in-house R&D (i.e., technological competition). Using a game-theoretical model, we find that technological cooperation is an equilibrium strategy when the technology transfer rate and entrant's R&D capacity are intermediate; while two firms engage in technological competition when the technology transfer rate is high and the entrant's R&D capacity is low, or when the technology transfer rate is low and the entrant's R&D capacity is high. We also find that the high royalty rate and mitigated price competition incentivize technological cooperation, while firms engage in technological competition when the royalty rate is low, or when the royalty rate is high and the price competition is intense. In addition, the incentives for firms to form technological cooperation vary non-monotonically with the length of the entrant's in-house R&D phase, and technological cooperation is reached only when the in-house R&D phase is of medium length. From a social perspective, both fairly high and low technology transfer rates ensure higher social welfare under technological cooperation, which under certain conditions can lead to a win-win-win outcome for the incumbent, entrant, and consumers. Furthermore, technological cooperation is less likely to be an equilibrium strategy when the entrant's market entry timing under in-house R&D is endogenously determined. Our findings can explain the observations of the incumbent and entrant's technological cooperation or competition strategies and provide managerial implications for competing ICT firms and policymakers.

Collusion, inattentive consumers and shrouded prices

We explore the incentives of firms to partition and shroud prices in a model where consumers may ignore a price component. In the static game shrouding can only arise under restrictive conditions if the market is sufficiently concentrated and the shrouded price component is sufficiently high. In the dynamic game we find strong pro-collusive effects of shrouding in that firms can more easily collude on shrouded prices than in the static game and collusion is also facilitated compared to standard Bertrand markets. Such collusive strategies are moderated if consumer learning is important.

Does the covid-19 pandemic create an incentive for firms to manage earnings? The role of board independence and corporate social responsibility

It is argued that managers took advantage of Covid-19 pandemic lockdowns and remote auditing and used earnings management (EM) practices extensively. Furthermore, the Covid-19 pandemic created new unsearched crisis-related incentives. This study, therefore, tests whether Covid-19 created a new incentive for managers to manipulate earnings. It also examines the association between corporate social responsibility (CSR) and board independence and EM during Covid-19. A data set of 384 firm-year observations from 2018 to 2021 of non-financial firms listed on the Amman Stock Exchange (ASE) was investigated. Results indicate that Jordanian firms engaged in EM during Covid-19 considerably more than when compared to pre-Covid-19, suggesting that Covid-19 created a new incentive for managers to manipulate earnings. Furthermore, Jordanian firms used income-increasing EM much more when compared to income-decreasing EM. However, when taking Covid-19 into account, no significant association was found between board independence and EM. In addition, the ability of CSR to constrain EM decreased. This adds to the current debate in the literature that even well-established monitoring mechanisms like board independence and CSR are unable to constrain EM practices in a unique business environment caused by Covid-19.

Development of Digital Platform Economy and Problems of Regulation in European Union

The ongoing growth of e-commerce has been changing the incentives and character of interaction between market participants at different levels of the vertical production chain. During the last 10 years, these trends have been attracting the attention of European antitrust and became a productive area of economic research. The altering nature of competition and the role of market participants influenced by the development of digital platforms have become the reference point for the emerging of new varieties of vertical restraints such as cross-platform parity agreements (across-platforms parity agreements). These types of agreements creates new incentives for firms. This was a challenge for the European Commission in the light of the preparation of the next edition of regulatory documents determining the legality of the application of vertical restrictive agreements, such as Vertical Block Exemption Regulation - "VBER" and Vertical Guidelines – "Guidelines for the Regulation of vertical restrictive agreements". We find it extremely interesting to identify to what extent the final versions of these regulatory documents took into account the opinions of judges, market participants and the academic community, who actively participated in identifying the most complex aspects of vertical interaction between firms and the growing role of digital platforms in this interaction.

Treat, Dump, or Export? How Domestic and International Waste Management Policies Shape Waste Chain Outcomes

Illegal or unwanted waste disposal methods such as dumping and export are prevalent in practice. To minimize the environmental harm of these methods, policymakers have implemented laws and regulations designed to combat them. Even so, violations are rampant as a high degree of heterogeneity between firms and proprietary information render monitoring imperfect. Decentralized waste disposal chains, a common form of interbusiness organization in this sector, compound this problem as firms also have limited information available on their waste chain partner, creating complex interactions between firm behavior and policy interventions. Against this background, we analyze the effects of domestic and international waste regulations targeting dumping and export, respectively, on firm incentives and compliance. We develop a two-tier waste chain with a producer that generates waste and an operator that treats it. The producer’s waste quality and the treatment operator’s efficiency can be private information. Either party can avoid compliance cost by violating regulations where the producer can arrange for export and the operator can dump locally. Our analysis reveals that primarily focusing on penalizing dumping by treatment operators can worsen environmental harm. Solely focusing on penalizing low-quality waste exports, a common intervention in practice, can also backfire. Instead, penalizing producers for downstream dumping should be given consideration. In addition, the asymmetry in export burden between waste quality levels should be reduced. This paper was accepted by Vishal Gaur, operations management.

CSR: Issues, Developments, and Strategies of Intervention

This article delves into Corporate Social Responsibility (CSR) and its significance, drawing upon existing theoretical and empirical literature. It explores the contextual and highly debated relationship between profitability and morality, focusing on India's cultural diversity and its social development challenges. CSR and Sustainable Development Goals (SDGs) have been localised to address these challenges. The article analyses the potential implications of mandated CSR under India's recently enacted Companies Act of 2022 on firm incentives, likely responses of corporations within the ambit of the law, and the implications of resource availability and delivery of social good. The success of addressing these implementation challenges will determine how far the objective of the new regulation is met. Ultimately, this paper studies the interface between CSR and social development, emphasising the importance of both in promoting sustainable growth.

Blocking patents, rent protection and economic growth

We develop a Schumpeterian growth model to analyze the interaction between patent policy and firms' internal strategies to capture value from innovations. We consider two dimensions of patent policy: backward protection against imitation and forward protection, also known as blocking patents, against subsequent innovation that builds on a patented technology. Incumbent patent holders endogenously invest resources to protect their monopoly rents by impeding market entry of innovative competitors. We show that patent policy impacts economic growth through its influence on both the ex ante R&D incentives of potential innovators and the post-innovation rent protection incentives of incumbent firms. Most importantly, our analysis formalizes a novel growth-promoting role of forward protection; by guaranteeing previous innovators a share of future innovators' profits, forward protection reduces the incentive to actively obstruct follow-on innovations. We identify conditions under which the selective use of forward protection can stimulate economic growth through this mechanism.

Does artificial intelligence kill employment growth: the missing link of corporate AI posture.

An intense debate has been on-going about how artificial intelligence (AI) technology investments have an impact on employment. The debate has often focused on the potential of AI for human task automation, omitting the strategic incentive for firms to cooperate with their workers as to exploit AI technologies for the most relevant benefit of new product and service innovation. We calibrate an empirical probit regression model of how changes in employment relate to AI diffusion, based on formalizing a game-theoretical model of a firm exploiting the twin role of AI innovation and AI automation for both absolute and competitive advantage. The theoretical game-theory prediction is that employment following AI technology adoption is not negative, and ultimately depends on how AI leads to new success in innovation, competition which defines the competitive reward of innovation and profit sharing between workers and firms. Our estimation, is based on a global survey of 3,000 large companies across 10 countries, demonstrates that a firm employment growth depends on two strategic postures, that is, the firm relative maturity of AI adoption as well as its relative bias toward AI-based product innovation. The contribution of this research is to highlight the twin role of firm and workers in shaping how technology will affect employment. AI in particular marries the potential of task automation with even more potential for expansion.

The impact of digital inclusive finance on the growth of the renewable energy industry: Theoretical and logical Chinese experience

The development of renewable energy is the key to tackling climate changes and ensuring energy security. Meanwhile, the process is usually associated with a huge investment and financing gap, especially for transitional countries like China. Hence, developing and innovating the traditional financial system is urgent. However, existing studies have mainly focused on traditional financial perspectives, and few papers have critically examined how digital financial inclusion affects the growth of renewable energy industries. To this end, using Chinese provincial data from 2011 to 2020 and applying Feasible Generalized Least Squares (FGLS) method, this study explores the effect of financial inclusion on renewable energy and its underlying mechanisms from the production and consumption perspectives. It is found that the impact of financial inclusion on the production side of the renewable energy industry is significantly better than on the consumption side, and there is heterogeneity effect in different energy resource varieties, different regional locations, and different financial regulation intensities. The financial inclusion on renewable energy has a significant pulling effect in photovoltaic and wind provinces, but not in large hydropower provinces. Then, its driving effect is particularly pronounced in the northern region. Nonetheless, it is not significant for renewable energy consumption in the southern region. Besides, this positive effect cannot be achieved without stronger financial regulation. The mechanism of action assessment finds that optimizes the consumption pattern, increase the competition of commercial banks, and improve technological innovation all contribute to the positive effect whereas, FDI shows the negative effect. This study provides new evidence on China's achievement of the energy transition, suggesting the need to further improve incentives for FDI firms and to strengthen consumption-side guidance.

Do capital incentive policies support today’s digitization needs?

Public support schemes are typically targeted towards capital investments. However, the targeting of digitization investments might not only be a missed opportunity to increase the usage of state-of-the-art digital services in the economy, but might even lower the uptake thereof. This paper exploits variation in the eligibility and the size of potential investment subsidies of German firms in order to analyse the relationship with the firms’ propensity to adopt cloud services. Our empirical results are in line with the hypothesis that capital investment schemes lower the use of cloud services by firms: the higher the potential subsidy for investments, the lower the incentive for firms to adopt cloud services. We consider this finding an unintended policy effect which is highly relevant for policy makers, as the adoption of cloud services has been linked to various benefits on the firm as well as on the aggregate economy level.

Let's lock them in: Collusion under consumer switching costs

Consumer switching costs reduce the price elasticity of existing customers while increasing competition for new ones, creating an “invest-and-harvest” incentive for firms. This paper examines the effect of this dual pricing incentive on firm behavior in a laboratory experiment both with and without switching costs and the ability to communicate. I find that switching costs reduce the price level for new consumers, while the price level for existing consumers is unaffected and the “harvesting” effect is comparatively muted. Markets with switching costs are more competitive and less tacitly collusive. Moreover, switching costs provide a focal point for price setting in the form of a minimum marginal cost mark-up, which is frequently chosen in tacit market sharing outcomes. The results have implications for antitrust policy.

Environmental protection expenditures and EU ETS: Evidence from Romania

We examine the impact of the European Union Emissions Trading System (EU ETS) on environmental protection expenditures over 2014–2015 for a representative sample of firms, which activate on Romanian territory. First, the findings reveal that EU ETS positively impacts current expenditures, namely, the short-time behavior of firms. Second, the results based on the investments selection model show that EU ETS has no statistically significant effect on the likelihood to invest, and the amount invested (i.e., long-term behavior). Overall, these results suggest that the EU ETS is a viable instrument, acting as a pivotal incentive for firms to undertake environmental expenditures.

Does capacity utilization crowd‐out research activity? Cross‐national evidence from firm‐level data

AbstractFocusing on a relatively under‐researched aspect, this paper examines the impact of capacity utilization by firms on their propensities to engage in research and development (R&D). Capacity utilization is related to a firm's current operations, while R&D is forward‐looking, related to the generation of new products and processes. Using a simple theoretical model to set up the hypothesis that greater capacity utilization lowers the incentives of firms to engage in research, our empirical research, based on survey data from thousands of firms across scores of nations, supports this hypothesis. Other results point to the importance of firm characteristics, as well as the perceptions about corruption and the informal sector. Some implications for policy are discussed.

Entangling knowledge search and innovation targets for inventing emerging technologies: the case for blockchain technology

PurposeWhile the growth of emerging technologies like Blockchain has created significant market opportunities and economic incentives for firms, it is valuable for both researchers and practitioners to understand their creation mechanisms. This paper aims to discuss the aforementioned objective.Design/methodology/approachBased on the knowledge search perspective, this study examines the impact of search boundary on innovation novelty and quality. Additionally, innovation targets, namely R&D innovation and application innovation, are proposed as the moderator of the knowledge search effect. Using a combination of machine learning algorithms such as natural language processing and classification models, the authors propose new methods to measure the identified concepts.FindingsThe empirical results of 3,614 Blockchain patents indicate that search boundary enhances both innovation novelty and innovation quality. For R&D innovation, the positive impact of search boundary on innovation quality is enhanced, whereas for application innovation, the positive effect of search boundary on innovation novelty is improved.Originality/valueThis study mainly contributes to the growing literature on emerging technologies by describing their creation mechanisms. Specifically, the exploration of R&D and application taxonomy enriches researchers' understanding of knowledge search in the context of Blockchain invention.

Obfuscation of Quality Information for Dual Bounded Rational Consumers

Abstract We study the incentives for firms’ obfuscation strategies and their impact on social welfare in a market with boundedly rational consumers. We assume that firms obfuscate product information, which can prevent consumers from acquiring type information. Some naive consumers in the markets exhibited limited comprehension and default bias toward higher-quality products. We show that firms chose obfuscation in all cases except those in which consumers have a strong degree of bounded rationality and more pessimistically evaluate themselves as the naive type. This means that for firms, the benefits from second-degree price discrimination are limited and obfuscation may be a more important strategy than informing. We also find that, under certain conditions, obfuscation may result in socially desirable product allocation. This result indicate that careful consideration needs to be given to policies that reduce the incentive for firms to obfuscate, such as increasing the proportion of sophisticated consumers.

A timing game in a mixed duopoly

This paper investigates a timing game in a mixed duopoly, whereby a relatively inefficient state-owned firm maximizing the linear combination of its profit and social welfare competes against a relatively efficient, profit-maximizing private firm over the timing of entry. We find that the incentives for firms to enter the market depend on the degrees of privatization of a state-owned firm and of the cost asymmetry between the two firms. We also provide welfare analysis by comparing the equilibrium timing of entry with the socially optimal one. When the two firms’ products are perfect substitutes, the socially optimal timing of both firms entering the market can be achieved if the state-owned firm is fully public.

Capacity shortages, regulation, and firm incentives in the generic drugs industry

AbstractDrug shortages are becoming more frequent and severe in the United States, especially for generic drugs. A lack of economic incentives has been cited as a root cause. Only few firms choose to produce a such drugs, and, if they do, these firms do not allocate large levels of capacity. Hence, total industry supply is limited, increasing the odds of shortages. We develop and analyze a stylized game‐theoretic model of a generic drug market to understand the impact of various governmental interventions on the total industry equilibrium supply. We explicitly consider firm market entry and exit decisions and the participating firms' incentives to allocate productive capacity to the focal drug market. We first characterize sustainable numbers of active drug manufacturers and their equilibrium capacity allocation decisions for a given regulatory environment. We then analyze the effects of different possible policy interventions on these equilibrium decisions and total industry capacity. Finally, we consider the impact of combinations of different interventions and, importantly, the sequence in which such combined interventions are introduced. A key result of our analysis is that the sequence of policy interventions may have an important effect on the resulting equilibrium industry capacity. When changing the regulatory environment, policymakers should be careful never to lead a sequence of changes with an adjustment that adversely affects pharmaceutical firms' incentives to allocate capacity to the focal drug market; we show that starting with capacity‐supporting interventions always is a dominant strategy when aiming to increase total industry capacity.

The Roles of Finance in ESG Management

AbstractAs shareholder capitalism has revealed its limitations since the outbreak of Covid‐19, there has been a growing demand for a shift toward stakeholder capitalism. Environmental, social, and governance (ESG) management seeks an optimal way to allocate resources to both financial and social values in order to enhance stakeholder utility. Given the various legal, theoretical, and empirical limitations of pluralistic stakeholder capitalism, it is necessary to focus on achieving instrumental stakeholder capitalism. In this regard, we present three roles that finance should play in promoting more firms to adopt ESG management. First, infrastructure needs to be established to measure and assess ESG value in a fair and objective manner. Financial firms should make efforts to develop a non‐financial disclosure and certification system, create an ESG index, expand research and investment in this area, and improve credit ratings. Second, there is a need to boost the intermediation of ESG‐linked finance in order to enhance utility for firms, investors, and governments. Third, it is crucial to facilitate the trading of ESG value in the market, as this could provide incentives for firms and help them cover the costs associated with ESG investments.

Lines of Credit and Family Firms: The Case of an Emerging Market

Lines of credit constitute an integral part of a firm’s liquidity policy; however, there is limited research on lines of credit in emerging markets. This study fills this gap by examining firm incentives to access and draw from lines of credit using the context of Jordan, a bank-based emerging market, focusing on the impact of family firms. To account for the endogeneity of family control, this study estimates the probability of accessing a line of credit using seemingly unrelated bivariate probit regression and its usage using treatment effect regression. The article documents that family firms are less likely to obtain a line of credit and their drawdowns are smaller compared to non-family firms. These findings support the agency’s view on having and using lines of credit. Other findings are consistent with a substitution effect between internal and external liquidity sources which implies a cost wedge between the two sources of liquidity.

Pulling together by paying together: The effect of product market competition on TMT incentive dispersion

We examine whether firms that face increased competition are more likely to seek uniformity in the incentive payments made to top management teams (TMTs). Motivated by social comparison theory, we conjecture that variation in executive incentive payments will reduce as a strategic response to encourage TMT cooperation. We test this hypothesis by examining how TMT incentive dispersion changes following exogenous product market competition shocks from reduced tariff cuts. Matched difference-in-differences regressions on a large sample of manufacturing firms between 1992 and 2019 support our prediction. Firms experiencing large tariff cuts are associated with both lower total- and equity-incentive dispersion. This effect is stronger for firms with more powerful CEOs, suggesting that CEOs are a key channel for implementing the strategic use of TMT incentives in firms facing external competition.