TY - JOUR AU - Cockburn,Iain AU - Henderson,Rebecca AU - Stern,Scott TI - Balancing Incentives: The Tension Between Basic and Applied Research JF - National Bureau of Economic Research Working Paper Series VL - No. 6882 PY - 1999 Y2 - January 1999 UR - http://www.nber.org/papers/w6882 L1 - http://www.nber.org/papers/w6882.pdf N1 - Author contact info: Iain M. Cockburn School of Management Boston University 595 Commonwealth Ave Boston, MA 02215 Tel: 617/588-1486 Fax: 815/550-2353 E-Mail: cockburn@bu.edu Rebecca Henderson Heinz Professor of Environmental Management Harvard Business School Morgan 445 Soldiers Field Boston, MA 02163 Tel: 617/495-8014 Fax: 617/496-4072 E-Mail: rhenderson@hbs.edu Scott Stern MIT Sloan School of Management 100 Main Street, E62-476 Cambridge, MA 02142 Tel: 617/253-3053 Fax: 617/253-2660 E-Mail: sstern@mit.edu AB - This paper presents empirical evidence that the intensity of research workers' incentives for the distinct tasks of basic and applied research are positively associated with each other. We relate this finding to the prediction of the theoretical literature that when effort is multi-dimensional, firms will balance' the provision of incentives; when incentives are strong along one dimension, firms will set high-powered incentives for effort along other dimensions which compete for the worker's effort and attention (Holmstrom and Milgrom, 1991). We test for this effect in the context of pharmaceutical research using detailed data on individual research programs financed by private firms. Consistent with the complementarity hypothesis, we find strong evidence that firms who provide strong promotion-based incentives for individuals to invest in fundamental or basic' research also provide more intense incentives for success in applied research through the capital budgeting process. The intensity of these bonus' incentives is weaker in firms who use a more centralized research budgeting process. We interpret this latter finding as providing support for theories which emphasize substitutability between contractible and non-contractible signals of effort (Baker, Gibbons, and Murphy, 1994). ER -