Working Paper No. 214

Agency Costs and Innovation

Published: September, 1989Pages: 40

Agency Costs and Innovation Bengt Holmström


Stylized facts indicate that small firms are responsible for a disproportionate share of innovative research. There are many possible explanations for this facto The paper seeks to understand this phenomena as the outcome of an optimal assignment of tasks across individuals and organizations. It is shown that incentive costs associated with a given task depend on the total portfolio of tasks that an individual or an organization undertakes. Mixing, hard to measure activities (innovation) with easy to measure activities (routine) is particularly costly, since it will either lead to misallocation of attention across tasks or to misallocation of risk. Larger firms are at a comparative disadvantage in conducting highly innovative research, because of the costs associated with managing a heterogeneous set of tasks. It is further argued that optimal organizational responses to coordination and control of routine tasks will lead to bureaucratization within the firm and to financial constraints imposed by capital markets, both of which are hostile to innovation.

Interdisciplinary European Studies

The European Union and the Return of the Nation State

9783030350048_200x_the-european-union-and-the-return-of-the-nation-state.jpg

This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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