Essays on Organization and Incentives in R&D and on Compatibility in Two-Sided Markets

Abstract

<p>This dissertation covers two distinct topics. Chapter 1 and Chapter 2 investigate a model with a principal and two agents, where the hidden action of agents is a source of moral hazard problem. It is shown that competition between agents can be used to improve their incentives even if their production technologies are independent. The first chapter shows that the principal is often better off financing innovation race between competing agents, rather than only one (even the most advanced) of them. The second chapter investigates advantages of competition as compared to team production, which is technologically more efficient. Chapter 3 deals with different topic: it studies two-sided markets and develop a theory of compatibility between subsequent generations of technology. <br /> More specifically, the first chapter analyzes innovation races in a moral hazard setting. We develop a model where two competing entrepreneurs work independently on the same project. The entrepreneurs do not possess any wealth of their own and their research is financed by a venture capitalist. The project, if successful, generates a prize, which is to be shared between the winning entrepreneur and the venture capitalist. The venture capitalist cannot observe the allocation of funds he provides, which creates a moral hazard problem. We compare a competitive setting with a benchmark case where the venture capitalist finances only one entrepreneur. It is shown that the venture capitalist can increase the efficiency of research (hence, his own expected profit from investments) and alleviate the moral hazard problem, if he finances both entrepreneurs. This conclusion is unambiguous, when the entrepreneurs are at the same stage of R&D. Moreover, it holds for a large range of parameters also when the entrepreneurs are at the different stages of R&D, so that one of them is the leader in the innovation race and the other is the follower.<br /> The second chapter analyzes incentive effect of competition by asking how far the advantage of competition goes when compared with team production which is technologically more efficient. To address this question we investigate the decision of a principal whether to employ a team or competing agents to perform a project. It is shown, that the principal prefers to employ the team, if the synergy effects of team production exceed certain threshold. This threshold increases with the value of the project: for more attractive projects positive incentive effect of competition tends to dominate productivity gains, generated by the team. It is shown that the principal can improve performance of the team by enforcing sequential production, or (if he is unable to enforce it) by relying on the team leader to do so. Yet, this measure is effective only if the efforts of team members are strategic complements. We conclude therefore, that we should observe principals switching to financing competing researches, rather than teams as a prize in stake increases.<br /> The last chapter provides a formal theory of compatibility choice between subsequent generations of technology in two-sided markets. We classify the compatibility regimes that can occur in two-sided markets. We explore how the decision of the monopolist to make technologies compatible (i.e., to choose a particular compatibility regime) depends on the characteristics of the market (size of installed base and market growth rate) and features of the new technology. The driving force that determines the choice of a compatibility regime is shown to be the tradeoff between incentives of the new agents on one side of the market and the incentives of the installed base on the other side of the market. Using this result, we characterize the choice of compatibility for three market structures: mature market, emerging market and asymmetric market. We show that compatibility for, say, users is likely to be imposed if the installed base of sellers is relatively small, the installed base of users is relatively small and the growth rate of this installed base is moderate. Further, the monopolist is less likely to improve compatibility if the technological progress is revolutionary. Our predictions about the choice of compatibility regime are illustrated by examples of particular two-sided markets.</p>