Gustavo Manso

Is Pay for Performance Detrimental to Innovation

Previous research in economics shows that paying the agent based on performance induces the agent to exert more effort thereby enhancing productivity. On the other hand, research in psychology argues that performance-based financial incentives may inhibit creativity and innovation. In a controlled laboratory experiment, we provide evidence that the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation. Subjects under such an incentive scheme explore more and are more likely to discover a novel business strategy than subjects under fixed-wage and standard pay-for-performance incentive schemes. We also find evidence that the threat of termination can undermine incentives for innovation, while golden parachutes can alleviate these innovation-reducing effects. Our results suggest that appropriately designed incentives are useful in motivating creativity and innovation.

Information Percolation With Equilibrium Search Dynamics

We solve for the equilibrium dynamics of information sharing in a large population. Each agent is endowed with signals regarding the likely outcome of a random variable of common concern. Individuals choose the effort with which they search for others from whom they can gather additional information. When two agents meet, they share their information. The information gathered is further shared at subsequent meetings, and so on. Equilibria exist in which agents search maximally until they acquire sufficient information precision and then search minimally. A tax whose proceeds are used to subsidize the costs of search improves information sharing and can, in some cases, increase welfare. On the other hand, endowing agents with public signals reduces information sharing and can, in some cases, decrease welfare.

Information Percolation in Segmented Markets

We study equilibria of dynamic over-the-counter markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and offers. Investors differ with respect to information quality, including initial information precision, and also in terms of market “connectivity,” the expected frequency of their bilateral trading opportunities. We characterize endogenous information acquisition and show how learning externalities affect information gathering incentives. More “liquid” markets lead to higher equilibrium information acquisition when the gains from trade and market duration are sufficiently large. On the other hand, for a small market duration, the opposite may occur if agents vary sufficiently in terms of their market connectivity.

Experimentation and the Returns to Entrepreneurship

Previous studies have argued that entrepreneurs earn less and bear more risk than salaried workers with otherwise similar characteristics. In a simple model of entrepreneurship, I show that estimates of mean and variance of returns to entrepreneurship used by these previous studies are biased, as they fail to account for the option value of experimenting with new ideas. Using longitudinal data, I find patterns that are consistent with entrepreneurship as experimentation and returns to entrepreneurship that are more attractive than established by previous research. Received October 31, 2015; accepted February 24, 2016 by Editor Andrew Karolyi.

Macroeconomic Risk and Debt Overhang

– Since corporate debt tends to be riskier in recessions, transfers from equity holders to debt holders that accompany corporate decisions also tend to concentrate in recessions. Such systematic risk exposures of debt overhang have important implications for corporate investment and financing decisions, and for the ex ante costs of debt overhang. Using a calibrated dynamic capital structure model, we show that the costs of debt overhang become higher in the presence of macroeconomic risk. We also provide several new predictions on how the cyclicality of a firm’s assets in place and growth options affect its investment and capital structure decisions.

Creating Incentives for Innovation

In an era of fast-paced technological change, innovation has become a business imperative. But it is not easy to make experimentation and risk-taking an integral part of an organization’s business practice. This article describes a model for motivating innovation based on probability theory and experimental evidence. This research indicates that corporate leaders should create a culture that tolerates early failure and rewards long-term performance, and employees from the CEO down must be given incentives to innovate. These lessons are broadly applicable in fields beyond business, such as scientific research and the academic world.

National Institutes of Health Peer Review: Challenges and Avenues for Reform

The National Institute of Health (NIH), through its extramural grant program, is the primary public funder of health-related research in the United States. Peer review at NIH is organized around the twin principles of investigator initiation and rigorous peer review, and this combination has long been a model that science funding agencies throughout the world seek to emulate. However, lean budgets and the rapidly changing ecosystem within which scientific inquiry takes place have led many to ask whether the peer-review practices inherited from the immediate postwar era are still well suited to 21st-century realities. In this essay, we examine two salient issues: (1) the aging of the scientist population supported by NIH and (2) the innovativeness of the research supported by the institutes. We identify potential avenues for reform as well as a means for implementing and evaluating them.