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Weak Property Rights and Holdup in R&D

Author

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  • Bharat N. Anand
  • Alexander Galetovic

Abstract

We study how the sequence of financing of R&D varies according to the ease with which property rights over knowledge can be defined. There are two financiers: a venture capitalist (VC) and a corporation. The knowledge acquired in costly research becomes embodied in the researcher's human capital, and she may hold up the financier and walk away with the project to develop it elsewhere. The main results are: (1) When property rights are strong, research is always funded by the VC, development is performed efficiently, and breakaways from the VC to the corporation are observed in equilibrium. (2) When property rights are weak, projects may be financed by the VC or the corporation, or may remain unfunded. (3) When property rights are weak, no breakaways occur in equilibrium; local spillovers and strong product market competition increase the likelihood that research projects will get funding. (4) The equilibrium sequence of R&D finance need not be first-best efficient. (5) In equilibrium, and controlling for the strength of property rights, VCs finance projects that are more profitable on average. Copyright (c) 2000 Massachusetts Institute of Technology.

Suggested Citation

  • Bharat N. Anand & Alexander Galetovic, 2000. "Weak Property Rights and Holdup in R&D," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 615-642, December.
  • Handle: RePEc:bla:jemstr:v:9:y:2000:i:4:p:615-642
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    Cited by:

    1. Sergei Guriev & Sudipto Bhattacharya, 2008. "Control Rights over Intellectual Property: Corporate Venturing and Bankruptcy Regimes," FMG Discussion Papers dp618, Financial Markets Group.
    2. Doyoung Kim & Jacques Lawarrée, 2009. "On the Information-Gathering Role of Firm-Sponsored Training for New Hires," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 165(2), pages 281-306, June.
    3. Nikolowa, Radoslawa, 2014. "Developing new ideas: Spin-outs, spinoffs, or internal divisions," Journal of Economic Behavior & Organization, Elsevier, vol. 98(C), pages 70-88.
    4. Thomas Hellmann & Veikko Thiele, 2011. "Incentives and Innovation: A Multitasking Approach," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 78-128, February.
    5. Luca Stanca & Herbert Dawid & Mariacristina Piva & Marco Vivarelli, 2015. "Are R&D investments by incumbents decreasing in the availability of complementary assets for start-ups?," LEM Papers Series 2015/12, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    6. Sudipto Bhattacharya & Sergei Guriev, 2006. "Patents vs. Trade Secrets: Knowledge Licensing and Spillover," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1112-1147, December.
    7. Colombo, Luca & Dawid, Herbert, 2016. "Complementary assets, start-ups and incentives to innovate," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 177-190.
    8. Bhattacharya, Sudipto & Guriev, Sergei, 2004. "Knowledge Disclosure, Patents and Optimal Organization of Research and Development," CEPR Discussion Papers 4513, C.E.P.R. Discussion Papers.
    9. Jarle Moen, 2005. "Is Mobility of Technical Personnel a Source of R&D Spillovers?," Journal of Labor Economics, University of Chicago Press, vol. 23(1), pages 81-114, January.
    10. Anand, Bharat N & Galetovic, Alexander, 2000. "Information, Nonexcludability, and Financial Market Structure," The Journal of Business, University of Chicago Press, vol. 73(3), pages 357-402, July.
    11. Patrick Herbst & Uwe Walz, 2017. "The Design of Vertical R&D Collaborations," Economica, London School of Economics and Political Science, vol. 84(333), pages 54-77, January.
    12. Rin, Marco Da & Hellmann, Thomas & Puri, Manju, 2013. "A Survey of Venture Capital Research," Handbook of the Economics of Finance, Elsevier.
    13. Goldfarb, Brent & Henrekson, Magnus, 2001. "Bottom-Up vs. Top-Down Policies towards the Commercialization of University Intellectual Property," SSE/EFI Working Paper Series in Economics and Finance 463, Stockholm School of Economics, revised 26 May 2002.
    14. Bronwyn Hall, 2004. "The financing of research and development," Chapters,in: Financial Systems, Corporate Investment in Innovation, and Venture Capital, chapter 2 Edward Elgar Publishing.
    15. Orman, Cuneyt, 2015. "Organization of innovation and capital markets," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 94-114.
    16. repec:kap:sbusec:v:49:y:2017:i:3:d:10.1007_s11187-017-9900-8 is not listed on IDEAS
    17. Hellmann, Thomas & Thiele, Veikko, 2015. "Friends or foes? The interrelationship between angel and venture capital markets," Journal of Financial Economics, Elsevier, vol. 115(3), pages 639-653.
    18. Luca Colombo & Herbert Dawid & Kordian Kabus, 2012. "When do thick venture capital markets foster innovation? An evolutionary analysis," Journal of Evolutionary Economics, Springer, vol. 22(1), pages 79-108, January.
    19. Stefan ARPING, 2002. "Cannibalization & Incentives in Venture Financing," FAME Research Paper Series rp51, International Center for Financial Asset Management and Engineering.
    20. Carolin Haeussler & Matthew J. Higgins, 2012. "Explaining Preferences for Control Rights in Strategic Alliances: A Property Rights and Capabilities Perspective Approach," NBER Working Papers 18364, National Bureau of Economic Research, Inc.
    21. Jean-Etienne de Bettignies, 2008. "Financing the Entrepreneurial Venture," Management Science, INFORMS, vol. 54(1), pages 151-166, January.
    22. Colombo, Luca & Dawid, Herbert & Piva, Mariacristina & Vivarelli, Marco, 2013. "Does Easy Start-Up Formation Hamper Incumbents' R&D Investment? A Theoretical and Empirical Analysis," IZA Discussion Papers 7302, Institute for the Study of Labor (IZA).
    23. Cuneyt Orman, 2010. "Organization of Innovation and Capital Markets (Teknolojik Yeniligin Orgutlenmesi ve Sermaye Piyasalari)," Working Papers 1010, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    24. Sudipto Bhattacharya & Sergei Guriev, 2013. "Control Rights Over Intellectual Property," Journal of Industrial Economics, Wiley Blackwell, vol. 61(3), pages 564-591, September.
    25. Hyytinen, Ari & Pajarinen, Mika, 2002. "Small Business Finance in Finland. A Descriptive Study," Discussion Papers 812, The Research Institute of the Finnish Economy.

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