Innovation and Corporate Conservatism

In this paper, we study the incentives of \u85rms to promote innovation. We analyze a situation in which an employee in a \u85rm is inspired with an idea for a new product. In a framework in which intellectual property rights on ideas are imperfect, we analyze the employees decision of whether to disclose the idea within the \u85rm, to stay silent and maintain the stausquo, or to form a spin-out \u85rm. Next, we look at the owners of the original \u85rm and analyze their incentives to promote creativity among employees. We show that \u85rms may have incentives to discourage both internal disclosure (fearing the reshu ing of rents within the \u85rm caused by an intra-\u85rm renegotiation) and spin-out formation (fearing the increase in market competition that a new \u85rm generates). However, we show that innovation bonuses, when possible, mitigate these problems and guarantee that innovation always takes place. Finally, we analyze how the governance structure a¤ects the \u85rms incentives to promote innovation.