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Dynamic contracting for innovation under ambiguity

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  • Bhattacharjee, Swagata

Abstract

Outsourcing of research is commonly observed in knowledge-intensive industries such as biotech. We model innovation as an ambiguous stochastic process with dynamically consistent updating. We assume that the research labs are less ambiguity averse than the commercial firms. We characterize the optimal sequence of short-term contracts governing innovation, and show how it facilitates ambiguity-sharing. This ambiguity sharing agreement mitigates the dynamic moral hazard problem, resulting in monotonically decreasing investment and preventing equilibrium delay. Compared to an ambiguity-neutral policymaker's benchmark, the research alliances stop experimenting too early, and may liquidate the project even after being patented. The problems are structural, redesigned patent laws cannot solve both of these problems.

Suggested Citation

  • Bhattacharjee, Swagata, 2022. "Dynamic contracting for innovation under ambiguity," Games and Economic Behavior, Elsevier, vol. 132(C), pages 534-552.
    • Handle: RePEc:eee:gamebe:v:132:y:2022:i:c:p:534-552
    DOI: 10.1016/j.geb.2022.01.015
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    More about this item

    Keywords

    Ambiguity; Dynamic contract; Patent law; Innovation; R&D;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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