This paper is a review of Manso's paper "Motivating Innovation" and is structured as follows: After summing up the theoretical and empirical results, the ambigious effects of Job Security will be critically discussed. Afterward it will be commented on some assumptions made in this paper while suggesting further novel research. Finally, the main findings of Manso will be stated.
In the age of disruptive technologies and business models, the most crucial factor innovation is moving more and more into the focus of attention of society. As leading innovative countries set the baron efficient solutions higher, the determinants stay somewhat nebulous. While Zahra and Covin (1994) suggest that "Innovation is widely considered as the [lifeblood] of corporate survival and growth", Bessant et al (2005) emphasize a more general defnition: "Innovation represents the core renewal process in any organization." The latter statement suggests that innovation is not solely important for business organizations but rather for any kind of complex institutions. While the USA emphasized the significance of innovation by launching the Department of Innovation alreadyin 2008 , Germany has increased the public funding of Research and Development by 0.5 percentage points to 3.5percent in the new coalition agreement in 2018. The Department of Trade of the UK exemplifes the relevance of accumulated innovation within acountry.
Many scientists have researched on the subject innovation. So do Aghion and Tirole (1994) argue that the outcomes of innovation are unclear, ergo it is difficult to find a cohesive contract which motivates innovation. Whereas the latter paper is studying the measurability of innovation, Manso’s article looks closely at the process of innovation and focuses on the central trade-off between exploration and exploitation. Moreover, Weitzman (1979) uses a simple bandit-problem to describe the innovation process. The substantial difference to Motivating Innovation is that Manso does not only study individual decision problems but also complements the agent by the principal to embed the bandit-problem into a principal-agentframework.The Principal-Agent setting allows him to inquire the tension between exploration and exploitation under a more realistic contract in which the agent usually exhibits private costs when receiving tasks from the principal.
Table of Contents
1 Introduction
2 Methodology
2.1 Theoretical Approach
2.1.1 Exploration and Exploitation
2.1.2 The Principal-Agent Problem
2.1.3 Incentives for Exploration and Exploitation
2.1.4 Role of Commitment
2.1.5 Optimal termination policy of the principal for exploration
2.1.6 Provision of feedback
2.2 Reference to Empirical Implications and Approaches
2.2.1 Empirical Implications
2.2.2 Empirical Approaches
3 Critics and Further novel research
4 Conclusion
5 Appendix
5.1 Propositions
5.2 Figures
Research Objectives and Key Topics
The primary objective of this seminar paper is to analyze the theoretical framework and empirical implications of Gustavo Manso's research on motivating innovation, specifically focusing on the trade-off between exploration and exploitation within principal-agent relationships.
- Theoretical tension between exploration and exploitation in innovation processes.
- Design of optimal incentive contracts for agents, including rewards for early failure and long-term success.
- The impact of organizational commitment, termination policies, and feedback mechanisms on innovation.
- Empirical evaluation of innovation practices through controlled field experiments and industry examples.
- Critical discussion of job security, managerial compensation, and potential biases in innovation research.
Excerpt from the Book
2.1.1 Exploration and Exploitation
In this subsection, I review the tension between exploration and exploitation. Manso defines exploitation as using conventional work methods to generate added value in a given task. On the other hand, exploration is the proxy for innovation, ergo new work methods in a given task. He approaches the problem with a two-armed bandit problem with one known arm, more specifically, probability of success. In this model, he uses a single-agent decision problem in two periods. This distinguishes from the Principal-Agent-Problem such that there are no external costs caused by the influence of a third party.
To differentiate between the two specifications, he enumerates each probability of successes for both actions exploitation and exploration in 1 and 2 respectively. In Action 1 the likelihood of success for both periods are equal, as conventional work methods do not change for both failure and success such that p1 = E[p1] = E[p1|S, 1] = E[p1|F, 1] (1). In Action 2 however, the conditional probability of success after success in the first period is higher than both expected probability of success in the second period and expected conditional probability of success after a failure in the first period as follows E[p2|F, 2] < E[p2] < E[p2|S, 2]. (2)
Summary of Chapters
1 Introduction: Provides context on the significance of innovation for institutional survival and introduces the core theoretical framework of Manso (2011) regarding exploration versus exploitation.
2 Methodology: Details the theoretical and empirical underpinnings of the model, exploring incentive contracts, the role of commitment, termination policies, and feedback loops.
3 Critics and Further novel research: Critically evaluates the assumptions regarding job security and suggests further research areas, including the role of promotion as a confounding variable.
4 Conclusion: Synthesizes the main findings, emphasizing that motivating innovation requires specific incentive designs like tolerance for failure and long-term success rewards.
5 Appendix: Contains the mathematical propositions and figures supporting the theoretical and empirical sections of the analysis.
Keywords
Innovation, Exploration, Exploitation, Principal-Agent Problem, Incentive Contracts, Early Failure, Long-term Success, Job Security, Organizational Economics, Venture Capital, Feedback Mechanisms, Corporate Governance, Empirical Research, Performance Incentives, Termination Policy.
Frequently Asked Questions
What is the fundamental focus of this paper?
The paper examines how organizations can design incentive structures to effectively motivate agents toward innovation, specifically contrasting the processes of exploration and exploitation.
What are the primary thematic areas covered?
The key themes include contract design, the necessity of tolerating early failure, the importance of long-term commitment, and the impact of managerial compensation on innovation.
What is the main research question?
The central question is how a principal can create a contract that incentivizes an agent to engage in exploration (innovation) rather than exploitation (conventional work) while managing the associated costs and information asymmetries.
Which methodology is employed in this paper?
The author uses a theoretical principal-agent framework based on Manso (2011), supplemented by empirical evidence from field experiments (e.g., Ederer and Manso, 2013) to validate the theoretical hypotheses.
What topics are discussed in the main body of the text?
The main body covers the theoretical model of exploration vs. exploitation, the role of commitment and feedback, the effect of termination policies on risk-taking, and empirical case studies from both academia and industry.
Which keywords best characterize the work?
Key terms include Innovation, Exploration, Exploitation, Principal-Agent Problem, Incentive Contracts, and Tolerance for Failure.
How does the author view the role of 'golden parachutes'?
The author discusses golden parachutes as a tool that fosters innovation by providing the agent with security, thereby reducing the fear of termination and encouraging long-term exploration.
What criticism does the author raise regarding 'Job Security'?
The author argues that high job security might have an ambiguous effect on innovation, suggesting that while it may encourage experimentation, it could also lead to reduced effort if workers feel insulated from dismissal.
Why is feedback considered critical in this model?
Feedback is deemed essential for exploration because it allows the agent to learn from performance data, whereas it is seen as unnecessary or detrimental for exploitation, which relies on repetitive, conventional tasks.
- Arbeit zitieren
- Oguzhan Bekar (Autor:in), 2018, Innovation. A review of Manso's paper "Motivating Innovation", München, GRIN Verlag, https://www.grin.com/document/459582
