Breaking Up a Research Consortium

48 Pages Posted: 7 May 2013 Last revised: 15 Mar 2015

See all articles by Andras F. Niedermayer

Andras F. Niedermayer

University of Mannheim - Department of Economics

Jianjun Wu

Compass Lexecon

Date Written: May 7, 2013

Abstract

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

Niedermayer, Andras Ferenc and Wu, Jianjun, Breaking Up a Research Consortium (May 7, 2013). Available at SSRN: https://ssrn.com/abstract=2261461 or http://dx.doi.org/10.2139/ssrn.2261461

Andras Ferenc Niedermayer (Contact Author)

University of Mannheim - Department of Economics ( email )

Mannheim 68131
Germany

HOME PAGE: http://andras.niedermayer.ch

Jianjun Wu

Compass Lexecon ( email )

United States

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