On the Firms’ Decision to Hire Academic Scientists

We analyse firms’ incentives to invest in scientific research as we characterize the optimal contracting of scientists intrinsically motivated to produce basic science. In our setting, firms face a large pool of heterogeneous scientists, with different degrees of scientific ability, and each scientist has reservation utility that is non-decreasing with their ability. Once hired scientists can spend time on their own basic agenda and on the firm’s applied agenda, but only the time spent on applied research is of direct value to the firm. The time spent on basic research is however indirectly valuable to the firm. We consider different scenarios, as we allow for asymmetric information. The main deterrent to hiring scientists with the highest ability is the opportunity cost, introduced via the type-dependent reservation utility. When the reservation utility is the same for all, top academics are hired. This result is robust to introducing moral hazard and adverse selection. When the reservation utility is positively correlated with the scientist’s ability, we show that the impact of moral hazard depends on whether scientists can be made residual claimants. Under adverse selection, firms must allow scientists to dedicate time to their own agenda in increasing proportion to their ability to ensure incentive compatibility. In equilibrium adverse selection triggers an excessive workload which puts pressure on the wage and leads firms to reduce their investment in science.