DP11215 The Management of Innovation: Experimental Evidence

Author(s): David J. Kusterer, Patrick W. Schmitz
Publication Date: April 2016
Keyword(s): Incomplete Contracts, Investment incentives, Laboratory experiments, Property rights
JEL(s): C92, D23, D86, O32
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11215

We report data from a laboratory experiment with 566 participants that was designed to test Aghion and Tirole's (1994a) management of innovation theory. A research unit and a customer can invest to increase the probability of making an innovation. When the innovation is made, the parties bargain over the division of the revenue. In line with Aghion and Tirole's (1994a) predictions based on the Grossman-Hart-Moore property rights approach, we find that ownership matters for the division of the revenue and the investments. However, communication can somewhat mitigate the theoretical problem that the customer will not relinquish ownership to the cash-constrained research unit.