Race Meets Bargaining in Product Development

20 Pages Posted: 20 Feb 2020

See all articles by Emin Karagözoğlu

Emin Karagözoğlu

Bilkent University

Kerim Keskin

Azerbaijan Diplomatic Academy; ADA University

Cagri Saglam

Bilkent University

Date Written: 2020

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).

Keywords: product development, contests, Nash bargaining solution, optimal contracts, subgame perfect Nash equilibrium, race

JEL Classification: C720, C780, D860, O310, O320

Suggested Citation

Karagözoğlu, Emin and Keskin, Kerim and Keskin, Kerim and Saglam, Cagri, Race Meets Bargaining in Product Development (2020). CESifo Working Paper No. 8109, Available at SSRN: https://ssrn.com/abstract=3541458 or http://dx.doi.org/10.2139/ssrn.3541458

Emin Karagözoğlu (Contact Author)

Bilkent University ( email )

Bilkent, Ankara 06533
Turkey
+90-312-2901955 (Phone)
+90-312-2665140 (Fax)

HOME PAGE: http://www.bilkent.edu.tr/~karagozoglu/

Kerim Keskin

Azerbaijan Diplomatic Academy ( email )

11 Ahmadbey Aghaoglu Street
Baku, AZ1008
Azerbaijan

ADA University ( email )

11 Ahmedbay Aghaoglu
Baki, AZ 1008
Baku, AZ 1008
Azerbaijan

Cagri Saglam

Bilkent University ( email )

Bilkent, Ankara 06533
Turkey

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