Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/215111 
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8109
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We introduce a model of product development in a firm. Our model describes the process as a multi-stage contest (i.e., race) with an endogenous length (with one stage or two stages) between two workers. We model the payments to workers from the new product using the normatively appealing Nash bargaining solution (see Nash, 1950). In our model the disagreement payoffs endogenously depend on the contest outcome. More precisely, a bargaining advantage is given to the leading worker in the product development contest. We analytically characterize subgame perfect equilibrium effort levels of workers and describe the conditions under which a full-edged final (as opposed to, say, a prototype) product is developed. Our comparative static analyses reveal economically intuitive insights. Finally, we provide an answer to the firm's problem of optimal incentive provision (considering both collective and individual incentives).
Subjects: 
product development
contests
Nash bargaining solution
optimal contracts
subgame perfect Nash equilibrium
race
JEL: 
C72
C78
D86
O31
O32
Document Type: 
Working Paper
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