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Moral Hazard and the Internal Organization of Joint Research

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  • Fabrizi, Simona
  • Lippert, Steffen

Abstract

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004We address the question of how the internal organization of partnerships can be affected by moral hazard behavior of their division(s)/agent(s). We explore cases where two entregreneurs, each employing one agent subject ot moral hazard, decide how to conduct a research project together. The project's success probability is affected by agent(s)' effort(s). A joint entity can take two configurations: either both, or only one agent is kept. If two agents are kept, all degrees of substitutability between agents' efforts are considered. We show that the privately optimal internal organization of the joint entity is also socially optimal, except when agents' efforts just start to duplicate each other. In this range, due to moral hazard, too few parterships keeping both agents occur as compared to what would be socially optimal. A restriction on the number of agents to be kept in a partnership would induce too few of them leading to socially worse outcomes.

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Bibliographic Info

Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 2003-10.

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Date of creation: Jun 2003
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Handle: RePEc:ehu:dfaeii:200310

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Postal: Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Keywords: joint projects; internal organization; agency problems; synergies;

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References

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  1. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers, University of California at Berkeley 8880, University of California at Berkeley.
  2. Paz Espinosa, Maria & Macho-Stadler, Ines, 2003. "Endogenous formation of competing partnerships with moral hazard," Games and Economic Behavior, Elsevier, Elsevier, vol. 44(1), pages 183-194, July.
  3. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, American Economic Association, vol. 82(5), pages 1293-306, December.
  4. Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 611-36, May.
  5. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, American Economic Association, vol. 78(5), pages 1133-37, December.
  6. Farrell, Joseph & Shapiro, Carl, 2000. "Scale Economies and Synergies in Horizontal Merger Analysis," Competition Policy Center, Working Paper Series, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley qt8v1500b8, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  7. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1357-67, November.
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Cited by:
  1. Ekaterina Goldfayn, 2006. "Organization of R&D With Two Agents and Principal," Bonn Econ Discussion Papers, University of Bonn, Germany bgse3_2006, University of Bonn, Germany.

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