Abstract
Levine and Smith (hereafter L&S) create a scenario in which there arises underinvestment in a risky project. They identify several regions, each one corresponding to a different type of underinvestment. Correspondingly, they suggest distinct remedies for each of the different types of underinvestment. A primary insight to come out of this research is that not all underinvestment can be remedied in the same way. For example, cutting out the opportunity to share information may counteract underinvestment in some situations, and yet exacerbate it in others.
In my comments below, I first provide a more detailed summary of the model and results and then describe two of my concerns with this paper. My first concern is whether this model captures innovation. My second concern is with the exogenous form of the compensation function as a function of divisional profits only. These concerns affect the interpretation and implications of the results rather than their validity.
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