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Dynamic Contracting for Innovation Under Ambiguity

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  • Swagata Bhattacharjee

    (Ashoka University)

Abstract

Outsourcing of research is commonly observed in knowledge-intensive industries e.g. biotech. We model innovation as an ambiguous stochastic process, and assume that the commercial firms are more ambiguity averse than the research labs. We characterize the optimal sequence of short-term contracts governing innovation, and show how it facilitates ambiguity sharing. The firm's ambiguity aversion mitigates the dynamic moral hazard problem, resulting in monotonically decreasing investment and prevents equilibrium delay. However, compared to an ambiguity-neutral policymaker's benchmark, the research alliance stops experimenting earlier, and may liquidate the project even after being patented; even redesigning patent laws cannot solve both of the problems.

Suggested Citation

  • Swagata Bhattacharjee, 2019. "Dynamic Contracting for Innovation Under Ambiguity," Working Papers 15, Ashoka University, Department of Economics, revised 02 Aug 2019.
    • Handle: RePEc:ash:wpaper:15
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    References listed on IDEAS

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    More about this item

    Keywords

    Ambiguity;

    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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