Working Paper: CEPR ID: DP9050
Authors: Patrick W. Schmitz
Abstract: An inventor can invest research effort to come up with an innovation. Once an innovation is made, a contract is negotiated and unobservable effort must be exerted to develop a product. In the absence of liability constraints, the inventor's investment incentives are increasing in his bargaining power. Yet, given limited liability, overinvestments may occur and the inventor's investment incentives may be decreasing in his bargaining power.
Keywords: holdup problem; incomplete contracts; limited liability; research and development
JEL Codes: D86; L23; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bargaining power (C79) | investment incentives (O31) |
| limited liability (K13) | investment incentives (O31) |
| bargaining power (C79) | investment incentives (under limited liability) (H32) |
| bargaining power (less) (C79) | investment incentives (more) (O31) |
| bargaining power (more) (C79) | investment incentives (less) (H32) |