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The Rise and Evolution of the Innovative Firm: A Tale of Technology, Market Structure, and Managerial Incentives

Year: 2026

Type: preprint

Abstract: We develop a dynamic general equilibrium model in which firms choose whether and how extensively to delegate managerial functions. Owners use incentive contracts to elicit costly managerial effort, and delegation becomes viable as firm profitability rises. Management and innovative investment are complementary: higher profitability supports a larger managerial organization, which raises the return to innovation and feeds back into firm value and market structure. This mechanism amplifies the effects of policy and fundamentals and can generate multiple steady states. We calibrate the model to the U.S. economy and study nonlinear transition dynamics and structural stability. The results show how market structure, managerial organization, innovation, and growth are jointly determined, and how the extensive margin of managerial employment can change the qualitative structure of the equilibrium. JEL Classification: E23; E24; E62; O30; O40.

Source: Research Square

DOI: 10.21203/rs.3.rs-11434946/v1

Authors: Domenico Ferraro, Maurizio Iacopetta, Pietro F. Peretto

Institutions: Arizona State University, SKEMA Business School, Institut d'Etudes Politiques de Paris, Duke University

Language: English

Topic: Firm Innovation and Growth

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: green

OpenAlex ID: W7225575476

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