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Contractibility and the Design of Research Agreements

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  • Josh Lerner
  • Ulrike Malmendier

Abstract

We analyze how variations in contractibility affect the design of contracts in the context of biotechnology research agreements. A major concern of firms financing biotechnology research is that the R&D firms might use the funding to subsidize other projects or substitute one project for another. We develop a model based on the property-rights theory of the firm that allows for researchers in the R&D firms to pursue multiple projects. When research activities are non-verifiable, we show that it is optimal for the financing company to obtain the option right to terminate the research agreement while maintaining broad property rights to the terminated project. The option right induces the biotechnology firm researchers not to deviate from the proposed research activities. The contract prevents opportunistic exercise of the termination right by conditioning payments on the termination of the agreement. We test the model empirically using a new data set on 584 biotechnology research agreements. We find that the assignment of termination and broad intellectual property rights to the financing firm occurs in contractually difficult environments in which there is no specifiable lead product candidate. We also analyze how the contractual design varies with the R&D firm's financial constraints and research capacities and with the type of financing firm. The additional empirical results allow us to distinguish the property-rights explanation from alternative stories, based on uncertainty and asymmetric information about the project quality or research abilities.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11292.

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Date of creation: May 2005
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Publication status: published as Josh Lerner & Ulrike Malmendier, 2010. "Contractibility and the Design of Research Agreements," American Economic Review, American Economic Association, vol. 100(1), pages 214-46, March.
Handle: RePEc:nbr:nberwo:11292

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. “Contractability and the Design of Research Agreements,” J. Lerner & U. Malmendier (2010)
    by afinetheorem in A Fine Theorem on 2013-03-05 08:53:29
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  1. Niedermayer, Andras & Wu, Jianjun, 2013. "Breaking up a research consortium," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 31(4), pages 342-353.
  2. Englmaier, Florian & Muehlheusser, Gerd & Roider, Andreas, 2014. "Optimal incentive contracts for knowledge workers," European Economic Review, Elsevier, Elsevier, vol. 67(C), pages 82-106.
  3. Evelyn Korn & Stephan Meisenzahl, 2009. "Contracting still matters! Or: How to design a letter of intent," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 200909, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  4. Chou, Ting-Kai & Ou, Chin-Shyh & Tsai, Shu-Huan, 2014. "Value of strategic alliances: Evidence from the bond market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 42(C), pages 42-59.
  5. Marie-Laure Allain & Emeric Henry & Margaret Kyle, 2011. "Inefficiencies in the sale of ideas: theory and empirics," Working Papers hal-00639128, HAL.
  6. Marco Furlotti, 2007. "There is more to contracts than incompleteness: a review and assessment of empirical research on inter-firm contract design," Journal of Management and Governance, Springer, Springer, vol. 11(1), pages 61-99, March.
  7. Hendrikse, G.W.J. & Windsperger, J., 2010. "Determinants of Contractual Completeness in Franchising," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm ERS-2010-017-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  8. Allain, Marie-Laure & Henry, Emeric & Kyle, Margaret K, 2011. "Inefficiencies in technology transfer: theory and empirics," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8206, C.E.P.R. Discussion Papers.
  9. Gambardella, Alfonso & Panico, Claudio, 2014. "On the management of open innovation," Research Policy, Elsevier, Elsevier, vol. 43(5), pages 903-913.
  10. Boone, Audra L. & Ivanov, Vladimir I., 2012. "Bankruptcy spillover effects on strategic alliance partners," Journal of Financial Economics, Elsevier, Elsevier, vol. 103(3), pages 551-569.
  11. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09iatrn4log is not listed on IDEAS
  12. Bester, Helmut & Münster, Johannes, 2013. "Subjective evaluation versus public information," Discussion Papers 2013/6, Free University Berlin, School of Business & Economics.
  13. Beshears, John, 2013. "The performance of corporate alliances: Evidence from oil and gas drilling in the Gulf of Mexico," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(2), pages 324-346.
  14. Thomas Mayer, 2012. "Ziliak and McCloskey's Criticisms of Significance Tests: An Assessment," Econ Journal Watch, Econ Journal Watch, vol. 9(3), pages 256-297, September.
  15. Niedermayer, Andras & Wu, Jianjun, 2013. "Breaking Up a Research Consortium," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 433, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  16. Panico, Claudio, 2011. "On the contractual governance of research collaborations: Allocating control and intellectual property rights in the shadow of potential termination," Research Policy, Elsevier, Elsevier, vol. 40(10), pages 1403-1411.
  17. Kloyer, Martin & Scholderer, Joachim, 2012. "Effective incomplete contracts and milestones in market-distant R&D collaboration," Research Policy, Elsevier, Elsevier, vol. 41(2), pages 346-357.
  18. Colombo, Massimo G. & Croce, Annalisa & Guerini, Massimiliano, 2013. "The effect of public subsidies on firms’ investment–cash flow sensitivity: Transient or persistent?," Research Policy, Elsevier, Elsevier, vol. 42(9), pages 1605-1623.
  19. Albert Banal-Estañol & Inés Macho-Stadler & David Pérez-Castrillo, 2011. "Research Output from University-Industry Collaborative Projects," Working Papers 539, Barcelona Graduate School of Economics.
  20. Panico, Claudio, 2012. "Control and contract design in research collaborations: A complete contract perspective," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 30(5), pages 459-470.

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