Innovation and Corporate Conservatism

M. Baccara and R. Razin

   Abstract

This paper focuses on firms' incentives to promote innovation. Innovative employees choose whether to disclose their ideas within their firms, or to form spin-outs. Renegotiations ensue upon internal disclosure, and outcomes are affected by information leakage and status-quo contracts. If the innovators' bargaining position is weak, they prefer forming spin-outs, and firms use status-quo contracts to deter the increase in competition generated by them. If the innovators' bargaining position is strong, firms stifle innovation to prevent the rent reshuffling caused by renegotiation. Innovation bonuses implement bargaining efficiency, while stock-based compensation mitigates, but does not erase, firms' incentives to discourage innovation.