Abstract
New product development (NPD) has shown significant roles in enterprises’ success, prosperity, and corporate survival. Nonetheless, substantial challenges arise from the high failure rate and uncertainty associated with NPD. In an attempt to mitigate these challenges, firms often delegate critical processes, including innovation development and market development, to project managers or marketing service providers. Unfortunately, such delegation creates information asymmetry issues, which leads to biased decisions and sub-optimal strategies for the firm. On the one hand, the effort provision of the project manager/ service providers is usually unobservable to the firm, implying moral hazard issue. On the other hand, in the innovation and market development process, the project managers/service providers possess more information about the project or market since they are directly responsible for the project and the end market, leading to adverse selection for the firm. In addition, firms run parallel projects in the NPD process to spread product failure risk. Competition arises among these parallel projects, including competition for invested resources, rewards, and product launch opportunities. This dissertation concentrates on the incentive design for innovation development and market development, taking into account the coexistence of adverse selection and moral hazard issues, as well as various forms of project competition.First of all, this dissertation focuses on innovation development, and examines the resource investment strategy and linear incentive design that incorporates fixed wages and unit incentives, in the context of resource competition among parallel projects. Our analysis takes into account adverse selection on the quality of product ideas, and reveals how asymmetric information and resource competition impact the investment strategy and incentive contracts. Project managers often possess private information regarding the quality of product ideas, while the firm runs multiple innovative projects simultaneously, determining whether to continue development and allocate investment resources based on the idea quality reported by the project manager. Our findings demonstrate that to induce hard work and truthtelling of idea quality, the firm provides unit incentives and high investment for project managers who report high-quality ideas, low investment for project managers who report medium-quality ideas, and no investment for project managers who report low-quality ideas; at the same time, it reduces the fixed wages as the quality of ideas increases. In the presence of adverse selection and moral hazard, under-investment is a persistent issue, particularly for low-quality ideas, when compared to the first-best investment. However, our results indicate that incorporating competing projects can alleviate under-investment issues for firms under certain conditions compared to the no-competition case. Thus, resource competition does not necessarily harm the firm. These findings enrich the existing literature on incentive design for NPD and offer practical guidance for firms in making investment decisions and designing incentives in the context of resource competition.
The second focus of this dissertation is on the market development process involving multi-party outsourcing. We address the challenges posed by adverse selection on marketing difficulty and double-sided moral hazard arising from the efforts of service providers and the firm’s pricing strategy. Specifically, we propose optimal product pricing strategies and incentive designs that incorporate both absolute and relative performance contracts (i.e., sales contests for service providers). Our analysis reveals the impact of asymmetric information on pricing strategies and incentive contracts. The market demand for a new product is influenced by key activities in market development, including the difficulty of implementing marketing activities in the target market, the efforts of the service providers, and the pricing strategy of the firm. These factors can give rise to adverse selection and double-sided moral hazard issues that negatively impact demand. Additionally, firms often collaborate with multiple marketing service providers located in different geographic regions and offer performance-based contracts for effort incentives. We propose the pricing strategy in the absence/presence of adverse selection and compare the incentive design based on relative performance and absolute performance. Our results show that in the absence of adverse selection, relative performance contracts outperform absolute performance contracts, and the firm can use the first-best pricing strategy by designing a relative performance contract. If there are both adverse selection and double-side moral hazard issues, relative performance contracts are preferred over absolute performance contracts when implementing marketing activities is less difficult; or when implementing marketing activities is very difficult and the demand is sensitive to the price. In this case, the firm should reduce the price for the market with lower marketing difficulty but increase the price for the market with higher marketing difficulty. These key findings enrich the related literature on product development and service outsourcing, offering theoretical foundations for firms’ pricing strategy and incentive design.
Lastly, this dissertation examines a scenario in which a firm delegates both innovation development and market development to project managers who compete for a single product launch opportunity. We propose a product development contest design that takes into account over-investment issues stemming from adverse selection on market demand and investigate the impact of asymmetric information on the optimal contest design. Firms run product development contests to improve product success likelihood and select the winners for product launches based on project rankings. When project managers are responsible for both innovation and market development, they possess superior demand information and have the incentive to hide or distort such information, making it challenging for the firm to terminate unpromising projects. To address the over-investment issue, an increasing number of firms are adopting termination rewards. This study designs the termination reward (to address over-investment) and success reward (to induce high effort) in the presence of moral hazard and adverse selection on market information under three types of contests: winner-takes-all, reward-sharing, and Tullock contests. Our analysis reveals that the reward-sharing contest is the optimal choice, with the firm choosing the best performer for product launch and evenly splitting the reward for all successful projects. Additionally, terminating unpromising projects may not always be the best course of action for the firm. It should only be done if and only if the investment efficiency loss exceeds the information rent for addressing over-investment. By comparing the optimal reward-sharing contest to a single project, our findings indicate that adopting a contest improves firm profit when the projects exhibit high uncertainty or share a significant amount of common resources. Interestingly, introducing a contest helps the firm mitigate the over-investment issue when the projects share fewer common resources. These findings offer insights into the optimal contest mechanism with over-investment issues and provide guidance for firms in designing product development contests.
| Date of Award | 31 Aug 2023 |
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| Original language | English |
| Awarding Institution |
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| Supervisor | Yimin YU (Supervisor) & Jie Gao (External Supervisor) |