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Englmaier, Florian (July 2010): Commitment in R&D Tournaments via Strategic Delegation to Overoptimistic Managers. SFB/TR 15 Discussion Paper No. 328 [PDF, 294kB]

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Abstract

This paper shows that it is profitable for a firm to hire an overoptimistic manager to commit to a certain investment strategy in an R&D tournament situation. In the unique symmetric equilibrium, all firms delegate to overoptimistic managers, where the optimal degree of overoptimism depends on the riskiness of the tournament. In these situations a manager’s type may serve as a substitute for delegation via contracts. By delegating to overoptimistic managers, firms can escape the rat race nature of R&D tournaments.

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