A Dynamic Analysis Of Product Innovation：Based on Incentives and Agent's Behaviors

this study investigates the design of incentive compensation and agents’ behaviors in product innovation. We develop a dynamic control model in which product quality improvement depends on both instantaneous investment and manager’s innovative effort. Moreover, we consider the sensitivity of cash flow to product quality, aiming at characterizing the firm’s heterogeneity and the specificity of each stage in product innovation. Our model shows that the effectiveness of the equity incentive is related to the type of the firm (e.g., technology and production companies). Further, the increasing impact of product quality on cash flow decreases the manager’s incentive compensation. In addition, we find that although the manager who places a greater emphasis on innovation is more likely to get equity by improving product quality, they will reduce both the amount and growth in their management efforts; this leads to a lack of overall effort