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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.

Suggested Citation

  • Fabrizi, Simona & Lippert, Steffen, 2004. "Moral Hazard and the Internal Organization of Joint Research," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 18, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:18
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    References listed on IDEAS

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    1. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
    2. Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, vol. 59(3), pages 611-636, May.
    3. Paz Espinosa, Maria & Macho-Stadler, Ines, 2003. "Endogenous formation of competing partnerships with moral hazard," Games and Economic Behavior, Elsevier, vol. 44(1), pages 183-194, July.
    4. Paz Espinosa, Maria & Macho-Stadler, Ines, 2003. "Endogenous formation of competing partnerships with moral hazard," Games and Economic Behavior, Elsevier, vol. 44(1), pages 183-194, July.
    5. Pastor, Maite & Sandonis, Joel, 2002. "Research joint ventures vs. cross licensing agreements: an agency approach," International Journal of Industrial Organization, Elsevier, vol. 20(2), pages 215-249, February.
    6. Yannis Caloghirou & Stavros Ioannides & Nicholas S. Vonortas, 2003. "Research Joint Ventures," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 541-570, September.
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    Cited by:

    1. Fabrizi, Simona & Lippert, Steffen, 2004. "How much efficiency gains and price reductions for an efficiency defense? 'Quanto Basta'," DFAEII Working Papers 2004-04, University of the Basque Country - Department of Foundations of Economic Analysis II.
    2. Ekaterina Goldfayn, 2006. "Organization of R&D With Two Agents and Principal," Bonn Econ Discussion Papers bgse3_2006, University of Bonn, Germany.

    More about this item

    Keywords

    internal organization of partnerships; moral hazard; efforts' interactions; cost functions;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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