Dynamic contracting for innovation under ambiguity

Swagata Bhattacharjee ()

Games and Economic Behavior, 2022, vol. 132, issue C, 534-552

Abstract: Outsourcing of research is commonly observed in knowledge-intensive industries such as biotech. We model innovation as an ambiguous stochastic process with dynamically consistent updating. We assume that the research labs are less ambiguity averse than the commercial firms. We characterize the optimal sequence of short-term contracts governing innovation, and show how it facilitates ambiguity-sharing. This ambiguity sharing agreement mitigates the dynamic moral hazard problem, resulting in monotonically decreasing investment and preventing equilibrium delay. Compared to an ambiguity-neutral policymaker's benchmark, the research alliances stop experimenting too early, and may liquidate the project even after being patented. The problems are structural, redesigned patent laws cannot solve both of these problems.

Keywords: Ambiguity; Dynamic contract; Patent law; Innovation; R&D (search for similar items in EconPapers)
JEL-codes: D81 D83 D86 L24 O32 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Dynamic Contracting for Innovation Under Ambiguity (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:132:y:2022:i:c:p:534-552

DOI: 10.1016/j.geb.2022.01.015

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