Compensating for innovation: Do small firms offer high‐powered incentives that lure talent and motivate effort?

Empirical studies commonly confirm that small firms enjoy efficiency advantages in generating innovation. However, the origin of this advantage remains poorly understood. This study explores the hypothesis that small firms enjoy advantages over large firms in crafting effective, incentive-intensive employment contracts that lure top engineering talent and motivate high effort. These hypotheses are tested using data from a sample of R&D engineers in Silicon Valley and the Route 128 area. Copyright © 2004 John Wiley & Sons, Ltd.