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Breaking up a research consortium

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  • Niedermayer, Andras
  • Wu, Jianjun

Abstract

Inter-firm R&D collaborations through contractual arrangements have become increasingly popular, but in many cases they are broken up without any joint discovery. We provide a rationale for the breakup date in R&D collaboration agreements. More specifically, we consider a research consortium initiated by a firm A with a firm B. B has private information about whether it is committed to the project or a free-rider. We show that under fairly general conditions, a breakup date in the contract is a (second-best) optimal screening device for firm A to screen out free-riders. With the additional constraint of renegotiation proofness, A can only partially screen out free-riders: entry by some free-riders makes sure that A does not have an incentive to renegotiate the contract ex post. We also propose empirical strategies for identifying the three likely causes of a breakup date: adverse selection, moral hazard, and project non-viability.

Suggested Citation

  • Niedermayer, Andras & Wu, Jianjun, 2013. "Breaking up a research consortium," International Journal of Industrial Organization, Elsevier, vol. 31(4), pages 342-353.
    • Handle: RePEc:eee:indorg:v:31:y:2013:i:4:p:342-353
    DOI: 10.1016/j.ijindorg.2013.05.002
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    More about this item

    Keywords

    Optimal R&D contracts; Adverse selection; Breakup date; R&D collaboration;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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