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

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.