Innovation management in organizations

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.euroecorev.2009.04.011 Byline: Roman Inderst Abstract: This paper poses the question of how a firm should optimally choose both its organization and its compensation in the pursuit of innovation. One key result is that incentive pay arises as a robust instrument of innovation management both with and without delegation, although in the present model its primary purpose is not to elicit more effort for the creation of new ideas, but to ensure that new ideas are implemented if and only if this is efficient. While without delegation, the firm may 'underinvest' in innovation, with delegation the opposite bias may arise as new ideas may be implemented too often ('overinvestment'). The optimal organizational choice trades off these two biases. Author Affiliation: University of Frankfurt and LSE, Germany Article History: Received 31 October 2007; Accepted 28 April 2009 Article Note: (footnote) [star] This paper is a fully revised version of an earlier draft entitled 'Incentives to Generate and Implement New Ideas,' which focused on the design of the incentive scheme only.