We study the interaction between an incumbent firm (F), which in the absence of a start-up is a monopolist in the industry, and a key R&D employee (E). The strategic incentives of the incumbent and of the employee are analyzed in a three-stage framework.
Stage 1: the incumbent's choice of K.
In the first stage, the firm generates a level of knowledge K ∈ [Kl, Ku], 0 b Kl b Ku, that is (partially) embodied in the employee. For simplicity,we assume that the unit costs of generating knowledge K are equal to one.
Stage 2: the bargaining between the incumbent and the employee.
In the second stage, the size of the knowledge stock K is common knowledge. The firm and the employee bargain over the size of a wage bonus that the latter receives from the firm if she does not create a start-up. If this bargaining results in disagreement, the employee leaves the firm and payoffs are determined according to the interaction described in stage 3. If it results in an agreement, then the bargaining outcome is determined according to a (symmetric) Nash bargaining solution.