Licensing Contracts: Control Rights, Options and Timing

38 Pages Posted: 26 May 2013 Last revised: 13 Oct 2015

See all articles by Pascale Crama

Pascale Crama

Singapore Management University - Lee Kong Chian School of Business

Bert De Reyck

UCL School of Management

Niyazi Taneri

NUS Business School, National University of Singapore

Date Written: October 12, 2015

Abstract

Research and development (R&D) collaborations, common in high-tech industries, are challenging to manage due to technical and market risks as well as incentive problems. We investigate how control rights, options, payment terms and timing allow the innovator to capture maximum value from its R&D collaborations with a marketer. Our study reveals a counterintuitive result; the innovator may, under certain conditions, prefer to grant launch control rights or buy-out options to the marketer despite the fact that both terms restrict its downstream actions. We demonstrate that a menu of contracts is not necessary to address the adverse selection problem as the menu can be replicated by a single option contract. We show that timing, through renegotiation or delayed contracting, as well as the careful allocation of control rights and options can have a significant influence on the value of collaborative R&D. We provide recommendations on the optimal contract structure and timing based on two project characteristics, novelty of the R&D process and market-potential variability.

Keywords: Research & Development; Innovation; Contract Design; Double Moral Hazard

JEL Classification: O31, O32

Suggested Citation

Crama, Pascale and De Reyck, Bert and Taneri, Niyazi, Licensing Contracts: Control Rights, Options and Timing (October 12, 2015). Available at SSRN: https://ssrn.com/abstract=2270168 or http://dx.doi.org/10.2139/ssrn.2270168

Pascale Crama

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Bert De Reyck

UCL School of Management ( email )

London, WC1E 6BT
United Kingdom

Niyazi Taneri (Contact Author)

NUS Business School, National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 119245
Singapore

Register to save articles to
your library

Register

Paper statistics

Downloads
212
rank
135,526
Abstract Views
862
PlumX Metrics