Incentives for Research Agents: Optimal Contracts and Implementation

We study the agency problem between a firm and its research employees. In a multi-agent contracting setting, we show explicitly the way in which the optimal incentive regime is a function of how agents' efforts interact with one another: relative-performance evaluation is used when their efforts are substitutes whereas joint-performance evaluation is used when their efforts are complements. We also provide an implementation of the optimal contract, in which a primary component of the agents' compensation is a risky security. This implementation gives a theoretical justification for the wide-spread use of stock-based compensation by firms that rely on R&D.