Weak Property Rights and Holdup in R&D

28 Pages Posted: 26 Sep 2012

See all articles by Bharat N. Anand

Bharat N. Anand

Harvard University - Strategy Unit

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Date Written: Winter 2000

Abstract

We study how the sequence of financing of R&D varies according to the ease with which property rights over knowledge can be defined. There are two financiers: a venture capitalist (VC) and a corporation. The knowledge acquired in costly research becomes embodied in the researcher's human capital, and she may hold up the financier and walk away with the project to develop it elsewhere. The main results are: (1) When property rights are strong, research is always funded by the VC, development is performed efficiently, and breakaways from the VC to the corporation are observed in equilibrium. (2) When property rights are weak, projects may be financed by the VC or the corporation, or may remain unfunded. (3) When property rights are weak, no breakaways occur in equilibrium; local spillovers and strong product market competition increase the likelihood that research projects will get funding. (4) The equilibrium sequence of R&D finance need not be first‐best efficient. (5) In equilibrium, and controlling for the strength of property rights, VCs finance projects that are more profitable on average.

Suggested Citation

Anand, Bharat N. and Galetovic, Alexander, Weak Property Rights and Holdup in R&D (Winter 2000). Journal of Economics & Management Strategy, Vol. 9, Issue 4, pp. 615-642, 2000. Available at SSRN: https://ssrn.com/abstract=2152218 or http://dx.doi.org/10.1111/j.1430-9134.2000.00615.x

Bharat N. Anand (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617 495-5082 (Phone)
617 495-0355 (Fax)

Alexander Galetovic

Universidad Adolfo Ibáñez ( email )

Peñalolén
Santiago
Chile

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )

Padua
Italy

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