Race meets bargaining in product development

Abstract

We study product development in a firm, utilizing a multistage contest model (i.e., race) with an endogenous length (with one stage or two stages) between two workers. We model the payments to workers using the normatively appealing Nash bargaining solution. We analytically characterize the equilibrium effort levels of workers and describe the conditions under which a full‐fledged final product (as opposed to, say, a prototype) is developed. We also provide an answer to the firm's problem of optimal incentive provision.