The Hay and the Carrot: A Model of Corporate Sponsoring of Academic Research

Abstract

In a moral hazard model with relationship-speci?c investment (?hay?) and limited liability (no ?stick?), we compare two institutional regimes: one without, and one with, ex-post incentives (?carrot?). We examine the welfare implications of introducing ?carrots?. We use this model to analyze corporate sponsoring of academic research. Under restrictive technological assumptions, the introduction of carrots meets certain ciency criteria and cannot make the agent (researcher) worse. These results no longer hold once we allow for a ?bang-for-your-buck?ect - which occurs when the researcher?s following the sponsor?s preferred strategy results in the principal (sponsor) being able to achieve the same results with fewer investment dollars - in conjunction with a concave value function for the sponsor. In this case, the introduc- tion of carrots may be inecient and may make the agent worse. However, if the agent is a monopolist, a renegotiation-proof contract implies that the agent can never be made worse by the introduction of carrots, and carrots never reduce social welfare.