Contractibility and the Design of Research Agreements

Josh Lerner and Ulrike Malmendier

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

Abstract: We analyze how contractibility affects contract design. A major concern when designing research agreements is that researchers may use their funding to subsidize other projects. We show that, when research activities are not contractible, an option contract is optimal. The financing firm obtains the option to terminate the agreement and, in case of termination, broad property rights. The threat of termination deters researchers from cross-subsidization, and the cost of exercising the termination option deters the financing firm from opportunistic termination. We test this prediction using 580 biotechnology research agreements. Contracts with termination options are more common when research is non-contractible.

Keywords: financing; property rights; cross-subsidization; biotechnology; Business; Social and Behavioral Sciences (search for similar items in EconPapers)
Date: 2008-01-24
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Contractibility and the Design of Research Agreements (2010)
Working Paper: Contractibility and the Design of Research Agreements (2005)
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