Max Planck Institute for Innovation and Competition, Munich, Room 313
How do firms choose their organization design to innovate better? We use The Patents (Amendment) Act, 2002 that initiated a stronger patents regime in India as a quasi-natural experiment to identify the causal effect of higher incentives for innovation on firm structure. We find that: stronger intellectual property (IP) proection leads to an increase in managers' share of compensation. Moreover, this increase is about 1.6-1.7% more for firms that were already above the median (in their respective industries) in terms of technology adoption. This increase in managerial compensation is due to a sharp increase in incentive pay. While there is an increase in both managerial layers and the number of divisions within a firm, it is the latter which explains th edifference in managerial compensation between high-tech and low-tech firms. In other words, stronger IP leads to an increase in both within-firm and between-firm wage inequality, with more robust evidence for between-firm inequality.
Contact Person: Dr. Fabian Gaessler