Innovation and Corporate Conservatism
M.Baccara and R.Razin
Abstract
In this paper we study the incentives of firms to promote innovation. We analyze a situation in which an employee in a firm is inspired with a new idea for a product. In a framework in which Intellectual Property Rights on ideas are imperfect, we analyze the employee's decision of whether to disclose the idea within the firm, to stay silent and maintain the staus-quo, or to form a spin out firm. Next, we look at the owners of the original firm and analyze their incentives to promote creativity among employees. We show that firms may have incentives to discourage both internal disclosure (fearing the reshuffling of rents within the firm caused by an intra-firm renegotiation), and spin-out formation (fearing the increase in market competition that a new firm generates). However, we show that innovation bonuses, when possible, mitigate these problems and guarantee that innovation always takes place. Finally, we analyze how the governace structure affects the firm's incentives to promote innovation.