Commitment in R&D tournaments via strategic delegation to overoptimistic managers

Abstract

This paper shows that it is profitable for a firm to hire an overoptimistic manager to commit to a certain investment strategy in an R&D tournament situation. In the unique symmetric equilibrium, all firms delegate to overoptimistic managers, where the optimal degree of overoptimism depends on the riskiness of the tournament. In these situations a manager's type may serve as a substitute for delegation via contracts. By delegating to overoptimistic managers, firms can escape the rat race nature of R&D tournaments.JEL classification: J 32, J 33, M 12

CEO optimism and incentive compensation

“…Potential explanations concerning why agents with biased beliefs may rise to the rank of CEO in the first place are provided, for example, by Englmaier (2007Englmaier ( , 2010Englmaier ( , 2011 and Goel and Thakor (2008). Furthermore, a large literature in psychology documents a widespread tendency in all humans to be overly optimistic regarding their abilities and their future.…”

Ceo Activism and Supply Chain Interactions

“…Work along this line of research includes Englmaier () who shows that hiring an overoptimistic manager who overestimates the product market's profitability constitutes a commitment to an aggressive cost‐reducing R&D strategy in quantity competition. Similarly, Englmaier () shows that by hiring a manager who overestimates his/her chances to succeed in a R&D tournament a firm can escape the R&D rat race and achieve a form of collusive behavior (see also Yu (2014) for a generalized version). In Englmaier and Reisinger (), hiring a biased CEO who incorrectly estimates the size of the market is the equilibrium strategy in both price and quantity competition.…”

The Management of Creative Vision and the Economics of Creative Cycles

“…Indeed, creative agents may be genetically programmed to over‐estimate and over‐represent their capacity to handle challenges inherent in the projects that they advocate (von Hippel and Trivers ). Englmaier () argues that such overoptimism can be an effective strategy under risky R&D technologies.…”