Delegation in an R&D Game With Spillovers

Summary: This paper considers a strategic delegation setting with R&D spillovers in a Cournot market. The game we analyze has four stages. First, own- ers have the option to hire a manager. If they decide to delegate, then in the contracting stage they have to determine the optimal incentives for the managers. In the R&D stage, the levels of investments in research and development are chosen which reduce production costs. Finally, in the pro- duction stage quantities offered on the market are selected. We characterize the sub-game perfect outcomes of this game depending on the level of R&D spillovers and derive the following main insights. First, in a case where no spillovers exist, both owners have the incentive to delegate R&D and pro- duction decisions to managers. This leads to higher outputs, higher R&D