Double-sided moral hazard and the innovator's dilemma

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I explain why current success might undermine an organization’s ability to innovate. I study a principal-agent relationship deciding whether to adopt an innovation. For the innovation to deliver profits, the agent must develop new capabilities, and the principal must divert resources from a profitable status quo. When contracts are incomplete and learning the innovation’s profitability takes time, a double-sided moral hazard problem arises. Its severity increases with the profitability of the status quo, implying that more successful firms have higher innovation costs after accounting for profit cannibalization. The model provides predictions about which innovations will prove to be more difficult for successful firms to adopt, and can explain why new firms have an advantage over established firms in adopting innovations that require new organizational knowledge.
Bibliographic citation: IDE, E. (2021). Double-sided moral hazard and the innovator's dilemma.
Date: 01/03/2021
Author(s): Enrique Ide
Document type: Working Paper
Department: Economics
Languages: English