R&D in a strategic delegation game revisited: a note

In this note we reconsider the paper of Zhang and Zhang (1997), published in Managerial and Decision Economics, who analyze a strategic delegation model with R&D spillovers in an imperfectly competitive market. We were motivated to study their setup by a puzzling result given in their paper: delegating the production and R&D decisions to managers is never beneficial for the owners of the firm. When we tried to understand the driving forces of this result, we found however that the findings of Zhang and Zhang (1997) are incorrect. We explain why their derivations are wrong and demonstrate via counterexamples that the main propositions in their paper do not hold. In addition, we show how the correct solution of this R&D model with spillovers can be obtained.