Veikko Thiele

Incentives and Innovation: A Multitasking Approach

This paper examines how employees trade off planned activities versus unplanned innovation, and how firms can choose incentives to affect these choices. It develops a multi-task model where employees makes choices between their assigned standard tasks, for which the firm has a performance measure and provides incentives, and privately observed innovation opportunities that fall outside of the performance metrics, and require ex-post bargaining. The model shows how firms adapt incentive compensations in the presence of such unplanned innovation. If innovation are highly firm-specific, firms provide lowerpowered incentives for standard tasks to encourage more innovation, yet in equilibrium employees undertake too few innovation. The opposite occurs if innovation are less firm-specific. We also investigate the effectiveness of several possibilities to encourage innovation, such as tolerance for failure, investing in employee innovation, stock-based compensation, and the allocation of intellectual property rights.

Friends or Foes? The Interrelationship between Angel and Venture Capital Markets

This paper develops a theory of how angel and venture capital markets interact. Entrepreneurs first receive angel then venture capital funding. The two investor types are ‘friends’ in that they rely upon each other׳s investments. However, they are also ‘foes,’ because at the later stage the venture capitalists no longer need the angels. Using a costly search model we derive the equilibrium deal flows across the two markets, endogenously deriving market sizes, competitive structures, valuation levels, and exit rates. We also examine the role of legal protection for angel investments.

Promotion tournaments and individual performance pay

We analyze the optimal combination of promotion tournaments and linear individual performance pay in an employment relationship. An agents effort is nonobservable and he has private information about his suitability for promotion. Thus, the two incentive schemes need to be combined to serve both incentive and selection purposes. If harder working agents respond less to intensified effort incentives, we find that the principal puts less emphasis on individual performance pay when selection becomes more important. Thus, we provide a possible explanation as to why, in practice, individual performance pay is less prevalent than promotion-based incentives.

Subjective Performance Evaluations, Collusion, and Organizational Design

Many scholars have emphasized the importance of subjective performance evaluations in employment relationships to provide employees with effort incentives. This article examines when delegating subjective appraisals to managers is optimal. Delegation facilitates more accurate performance evaluations but can also lead to collusion. To prevent collusive behavior, I show that firms need to reduce effort incentives for employees and leave managers with economic rents through higher compensations. Despite these costs of preventing collusion, I find that delegation can be optimal. The Author 2011. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Task-specific abilities in multi-task principal–agent relationships

This paper analyzes a multi-task agency framework where the agent exhibits task-specific abilities. It illustrates how incentive contracts account for the agents task-specific abilities if contractible performance measures do not reflect the agents multidimensional contribution to firm value. This paper further sheds light on potential ranking criteria for performance measures in multi-task principal-agent relationships. It demonstrates that performance measures in multi-task agencies cannot necessarily be compared by their respective signal-to-noise ratio as in single-task agency relationships. In fact, it is indispensable to take the induced effort distortion and the measure-cost efficiency into consideration--both determined by the agents task-specific abilities.

Contracting Among Founders

This article develops a theory of contracting among founders of a new firm. It asks at what stage founders agree to commit to each other, how they structure optimal founder contracts, and how this affects team formation, ownership, incentives, and performance. The article derives a trade-off between upfront contracting, which can result in teams with ineffective founders, versus delayed contracting, which can enable some founders to appropriate ideas and start their own firms. Delayed contracting becomes more attractive when there are significant doubts about the skills of founders. We show that contingent contracts with vesting of shares may be used to mitigate inefficiencies in the team formation process. We also show that laws that provide protection to implied partnerships may have the unintended effect of encouraging more formal contracting. (JEL D82, D86, K12, L26)

Performance Measurement in Multi-Task Agencies

This paper analyzes a multi-task agency model with a risk-neutral and financially constrained agent. The agents performance evaluation is thereby incongruent, i.e. it does not perfectly reflect the relative contribution of the agents multi-dimensional effort to firms profit. This paper elaborates on the improvement of the agents performance evaluation through the costly acquisition of additional performance measures aimed at inducing the agent to implement a more efficient effort allocation across tasks. It contrasts two alternatives for the principal: (i) to centrally invest in the information acquisition; or (ii), to delegate this task to a supervisor. This paper demonstrates that the principal generally favors delegation for a sufficiently incongruent measurement of the agents performance, and a centralized investment, otherwise.

Competition in the Venture Capital Market and the Success of Start-Up Companies: Theory and Evidence

We examine the effect of a competitive supply of venture capital (VC) on the exits (IPO or M&A) of startups. We develop a matching model with double-sided moral hazard, and identify a novel differential effect of VC competition on the success of startups. Using VC data, we find evidence for this differential effect. For example, when the VC market becomes more competitive (HHI decreases from its mean 0.08 to 0.04), the absolute likelihood of success increases by 2.8 percent for startups backed by less experienced VC firms, but it decreases by 3.6 percent for startups backed by the most experienced VC firms.

Fostering Entrepreneurship: Promoting Founding or Funding?

Governments across the globe are eager to foster entrepreneurial ecosystems, yet there is no consensus on what policies to use. We develop a theory about the equilibrium consequences of two canonical types of entrepreneurship policies: policies that encourage entrepreneurs to found new ventures, and policies that encourage investors to fund new ventures. We distinguish between a short-term impact on current market activity, versus a long-term impact on future activity. Investing in entrepreneurial ventures requires tacit knowledge that is mainly acquired through prior entrepreneurial experience, implying that the supply of capital depends on successful entrepreneurs from prior generations. Recognizing this intergenerational linkage has a profound impact on the market equilibrium, and the effect of entrepreneurship policies. Our analysis identifies a rationale for using funding polices.

Employment vs. Entrepreneurship: Risk Aversion and Occupational Choice

We develop an equilibrium model where risk-averse agents can choose between employment and entrepreneurship. An important property of our framework is that the effort of agents is not observable (moral hazard), so that optimal employment contracts must be incentive compatible. In equilibrium we show that more risk-averse agents tend to select into employment. However, we show that income risk is not the only driver for the occupational choice of agents with entrepreneurship options - as commonly argued. Instead, more risk-averse agents with those options have a lower valuation of entrepreneurship, and are therefore less costly for firms to employ. In equilibrium firms in industries where such options are prevalent then adjust their employment contracts to attract the more risk-averse agents.