Gustavo Manso is Professor of Finance, Entrepreneurship, and Innovation at the Haas School of Business, University of California, Berkeley, where he holds the Marie-France and Rene Kern Chancellor's Chair in Entrepreneurship. He studies how incentives affect innovation, entrepreneurship, and financial decisions.
He joined Berkeley Haas in 2012 after five years on the faculty of the MIT Sloan School of Management. He received a PhD in Finance from the Stanford Graduate School of Business in 2006, an MS in Mathematics from IMPA (Instituto de Matemática Pura e Aplicada) in Brazil, and a BA in Economics from PUC-Rio. He co-founded the Finance Theory Group in 2009, served as a Department Editor of Management Science from 2013 to 2021, and received the Earl F. Cheit Award for Excellence in Teaching in the Berkeley Haas Full-Time MBA program in 2012.
What does Gustavo Manso work on?
Most of his research asks how incentives shape the choice between exploring new ideas and exploiting known ones: in managerial compensation, research funding, corporate governance, ownership structure, and entrepreneurship. A second strand studies how information spreads and is used in markets, and a third studies corporate and household debt.
Incentives for innovation
Contracts that motivate innovation look different from standard pay-for-performance. Because innovation means exploring untested approaches that often fail at first, the optimal scheme tolerates, and can even reward, early failure, and rewards long-term success; commitment to a long-term plan, job security and timely feedback are part of the same package. Manso derives this result in "Motivating Innovation" (Journal of Finance, 2011), which shows that in executive pay the scheme can be implemented with long-vesting stock options, option repricing, golden parachutes and a degree of managerial entrenchment.
Later work tests the idea. In a laboratory experiment with Florian Ederer (Management Science, 2013), subjects paid under tolerance for early failure and reward for long-term success explored more and were more likely to discover a novel strategy than subjects under fixed wages or standard pay-for-performance. Among academic life scientists (with Pierre Azoulay and Joshua Graff Zivin, RAND Journal of Economics, 2011), investigators funded by the Howard Hughes Medical Institute, whose appointments give long horizons and tolerance for failure, produced high-impact papers at a much higher rate than comparable NIH-funded scientists and moved into newer lines of inquiry. Related papers examine how going public or private, board independence, shareholder litigation and the business cycle shift firms between exploration and exploitation.
Entrepreneurship and experimentation
Entrepreneurship is a way of experimenting with a new idea, with the option to quit if it does not work. Treating it that way, "Experimentation and the Returns to Entrepreneurship" (Review of Financial Studies, 2016) shows that earlier estimates that entrepreneurs earn less and bear more risk than employees are biased, and that lifetime returns to entrepreneurship are more attractive than previously found. Work with Yi Huang, Chen Lin and Sibo Liu uses data from Taobao to show that people start online businesses after seeing a neighbor's store succeed, and that entrants motivated this way do worse.
Information and learning in markets
A series of papers with Darrell Duffie, Semyon Malamud and Gaston Giroux, including "Information Percolation with Equilibrium Search Dynamics" (Econometrica, 2009), characterizes how privately held information spreads through decentralized markets as agents meet and trade, and how fast beliefs converge. Other papers study the feedback effects of credit ratings and product recommendations, obfuscation in retail financial products, and the effect of paternalistic advice on how much information people gather.
Corporate and household finance
Papers on debt study how debt overhang distorts investment, how macroeconomic risk changes its cost, and how performance-sensitive debt works as a screening device. Work with Alejandro Rivera, Hui (Grace) Wang and Han Xia extends the idea of debt overhang to households: indebtedness changes how much people work and how much they invest in their own skills, and the non-dischargeability of student loans alters those incentives.
Selected work on incentives for innovation
The optimal incentive scheme for motivating innovation tolerates, or even rewards, early failure and rewards long-term success. Commitment to a long-term compensation plan, job security and timely feedback are also essential. In managerial pay, the scheme can be implemented with stock options with long vesting periods, option repricing, golden parachutes and managerial entrenchment.
Is Pay-for-Performance Detrimental to Innovation?
In a laboratory experiment, subjects paid under tolerance for early failure combined with reward for long-term success explored more and were more likely to discover a novel business strategy than subjects under fixed wages or standard pay-for-performance. The threat of termination reduced exploration, and golden parachutes offset that effect.
Incentives and Creativity: Evidence from the Academic Life Sciences
Investigators of the Howard Hughes Medical Institute, whose funding tolerates early failure, rewards long-term success and gives freedom to experiment, produce high-impact papers at a much higher rate than similarly accomplished NIH-funded scientists, and their research moves in more novel directions.
Incentives to Innovate and the Decision to Go Public or Private
It is optimal to go public to exploit existing ideas and to go private to explore new ones. Private firms are less transparent, so insiders can exit early if they receive bad news, which makes them more tolerant of failure; public prices react quickly to good news, which pushes insiders toward conventional projects.
Independent Boards and Innovation
Firms that move to independent boards patent more and are cited more, but in crowded, familiar areas of technology and through incremental patents in the middle of the citation distribution; the uncited and highly cited tails associated with riskier search do not change.
Shareholder Litigation and Corporate Innovation
After states adopted universal demand laws, which make it harder for shareholders to file derivative lawsuits, firms invested more in R&D and produced more patents in new technology classes, more patents built on new knowledge, and more highly cited and more valuable patents. The pressure of shareholder litigation discourages exploratory innovation.
Common questions
Does pay-for-performance hurt innovation?
Not by itself. In the Ederer–Manso laboratory experiment, standard pay-for-performance produced no more exploration than fixed wages; the scheme that did was tolerance for early failure combined with reward for long-term success. What hurts innovation is pay that punishes the early failures exploration produces: the threat of termination reduced exploration in the experiment, and golden parachutes offset that effect.
What is the main result of "Motivating Innovation"?
The optimal contract for motivating innovation tolerates, or even rewards, early failure and rewards long-term success. It requires commitment to a long-term compensation plan, job security and timely feedback. In executive compensation it can be implemented with long-vesting stock options, option repricing, golden parachutes and managerial entrenchment, which is close to the opposite of the short-horizon, failure-punishing contracts that motivate routine effort.
Is entrepreneurship a bad deal financially?
Not once the option to quit is counted. Cross-sectional comparisons of entrepreneurs with employees ignore that a person who starts a business learns whether it works and can return to salaried work if it does not. In longitudinal data, entrepreneurial spells are short, exit follows bad performance, failed entrepreneurs are not penalized on their return, and successful ones earn substantially more than comparable employees.
Contact
Email manso@berkeley.edu. Office F688, Haas School of Business. Mailing address: 545 Student Services Building #1900, Berkeley, CA 94720-1900. See the contact page for phone numbers and administrative support.