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On contracting for uncertain R&D

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Author Info
Rajeev K. Goel (Department of Economics, Illinois State University, Normal, IL, USA)

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Abstract

Using a two-stage model, this paper studies auctions of research and development (R&D) contracts when the outcome of research is uncertain. The agent is contracted by the principal to invent a new product or a new process. The principal selects the most capable agent through an auction and writes an incentive contract with the winning agent to share risks. The main finding of the paper is that the generally superior incentive contracts might not be desirable under plausible conditions in R&D contracting. In particular, we find that the principal prefers a cost-plus contract in cases of large R&D projects or rising innovation benefits, but would prefer a fixed-price contract when the number of bidders increases. An alternate elasticity interpretation of results holds promise for empirical analysis. Public policy implications are finally discussed. Copyright © 1999 John Wiley & Sons, Ltd.

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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 20 (1999)
Issue (Month): 2 ()
Pages: 99-106
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Handle: RePEc:wly:mgtdec:v:20:y:1999:i:2:p:99-106

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. David Sappington, 1982. "Optimal Regulation of Research and Development under Imperfect Information," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 354-368, Autumn. [Downloadable!] (restricted)
  2. Kamien, Morton I. & Schwartz, Nancy L., 1980. "A generalized hazard rate," Economics Letters, Elsevier, vol. 5(3), pages 245-249. [Downloadable!] (restricted)
  3. Morton I. Kamien & Nancy L. Schwartz, 1980. "A Generalized Hazard Rate," Discussion Papers 435, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  4. Laffont, Jean-Jacques & Tirole, Jean, 1987. "Auctioning Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 921-37, October. [Downloadable!] (restricted)
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  5. R. Preston McAfee & John McMillan, 1986. "Bidding for Contracts: A Principal-Agent Analysis," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 326-338, Autumn. [Downloadable!] (restricted)
  6. Delbono, Flavio & Denicolo, Vincenzo, 1993. "Regulating innovative activity : The role of a public firm," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 35-48, March. [Downloadable!] (restricted)
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  7. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June. [Downloadable!] (restricted)
  8. B. Caillaud & R. Guesnerie & P. Rey & J. Tirole, 1988. "Government Intervention in Production and Incentives Theory: A Review of Recent Contributions," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 1-26, Spring.
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  9. Rogerson, William P, 1994. "Economic Incentives and the Defense Procurement Process," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 65-90, Fall. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stephen Martin & John T. Scott, 1999. "The Nature of Innovation Market Failure and the Design of Public Support for Private Innovation," CIE Discussion Papers 1999-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics. [Downloadable!]
    Other versions:
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