Workshop’s Topic: Over-investment is commonly observed in the product development contest, resulting in investment efficiency loss. This inefficiency results from the two-dimensional information asymmetry between the firm and the project managers: the managers are privately aware of their efforts and the market conditions. To address the issue, the firm can incentivize the managers to exert efforts in developing their projects and reveal unpromising market conditions through success rewards and termination rewards. In this paper, we build a stylized principal-agent model for contest design in the presence of moral hazard (i.e., hidden effort) and adverse selection (i.e., hidden market information).
Our results show that reward-sharing contest yields the highest profit for the firm, which is robust for risk-averse managers, multiple managers, and general success likelihood. Our findings indicate that moral hazard is the primary driver and adverse selection is the secondary driver of this result. Under reward-sharing contest, we find that it is optimal for the firm to allocate the success reward equally between all successful projects. The firm avoids the over-investment issue only when the over-investment loss exceeds the information rent of eliciting unfavorable market conditions and vice versa. This study provides an explanation for the popularity of reward-sharing contests, and the adoption of the termination reward in addressing the over-investment issue. Our results also provide guidelines on the contest design of product development in the presence of moral hazard and adverse selection.
Time and Location: 10:00-11:30 AM (GMT+8), Room A523 (School of Management)
Language: Bilingual (Chinese and English)
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Introduction of Speakers |
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Assoc. Prof. YU Yimin City University of Hong Kong, Department of Management Sciences/Department of Marketing |
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Dr. YU Yimin is an Associate Professor in the Department of Management Sciences/Department of Marketing at City University of Hong Kong. He received his Ph.D. degree from University of Minnesota, Twin Cities and his B.S. from University of Science and Technology of China. His research focuses on supply chain management and service operations, including optimal design of inventory-production systems, incentive issues in supply chains and pricing strategies. His research has appeared in leading business journals including Manufacturing & Service Operations Management, Marketing Science, Operations Research, and Production and Operations Management. He is also the Coordinator of the Management Sciences PhD Programme at City University of Hong Kong. After his talk, he will introduce the Management Sciences PhD Programme and answer questions about applying the programme. |
