Breaking Up a Research Consortium
48 Pages Posted: 7 May 2013 Last revised: 15 Mar 2015
Date Written: May 7, 2013
Inter-firm R&D collaborations through contractual arrangements have become increasingly popular, but in many cases they are broken up without any joint discovery. We provide a rationale for the breakup date in R&D collaboration agreements. More specifically, we consider a research consortium initiated by a firm A with a firm B. B has private information about whether it is committed to the project or a free-rider. We show that under fairly general conditions, a breakup date in the contract is a (second-best) optimal screening device for firm A to screen out free-riders. With the additional constraint of renegotiation proofness, A can only partially screen out free-riders: entry by some free-riders makes sure that A does not have an incentive to renegotiate the contract ex post. We also propose empirical strategies for identifying the three likely causes of a breakup date: adverse selection, moral hazard, and project non-viability.
Keywords: Optimal R&D contracts, adverse selection, breakup date, R&D collaboration
JEL Classification: C72, D82, L20
Suggested Citation: Suggested Citation