Residual income claimancy, monitoring, and the R&D firm: Theory with application to biotechs

Koyin Chang and John Garen
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Koyin Chang: Department of Healthcare Information and Management, Ming-Chuan University, TaoYuan, Taiwan, Postal: Department of Healthcare Information and Management, Ming-Chuan University, TaoYuan, Taiwan
John Garen: Department of Economics, Gatton College of Business and Economics, University of Kentucky, Lexington, KY 40506-0034, USA, Postal: Department of Economics, Gatton College of Business and Economics, University of Kentucky, Lexington, KY 40506-0034, USA

Managerial and Decision Economics, 2004, vol. 25, issue 8, 489-507

Abstract: This paper models the assignment of residual income claimancy to an R&D manager and applies the model to biotechnology firms. Residual income claimancy provides incentives for the manager to monitor the R&D process. Since the nature of R&D and of monitoring scientific effort is different, our model predicts stark differences in the residual income claimancy of managers and in other aspects of organization for innovative R&D firms like biotechs. In particular, R&D firms are expected to be more owner-managed, more expert-managed, and smaller in size. Cross-sectional data on biotechnology firms is consistent with these implications. Additionally, longitudinal data indicate that as firms alter their focus on biotech research, their organizational structure changes as expected. Our approach suggests a process of firm and industry evolution related to technological maturity and points to the importance of incentives rather than risk sharing in determining organizational form, similar to the original analysis of franchising. Copyright © 2004 John Wiley & Sons, Ltd.

Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:25:y:2004:i:8:p:489-507

DOI: 10.1002/mde.1179

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