Weak Property Rights and Hold-Up in R&D
Harvard Business School Working Paper No. 99-007
Posted: 22 Jan 2001
Date Written: June 2000
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 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: (a) 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. (b) When property rights are weak, projects may be financed by the VC or the corporation, or may remain unfunded. (c) 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. (d) The equilibrium sequence of R&D finance need not be first-best efficient. (e) In equilibrium, and controlling for the strength of property rights, VCs finance projects that are more profitable on average.
Keywords: Corporate R&D, human capital, incomplete contracts, local spillovers, venture capital
JEL Classification: O30, L22
Suggested Citation: Suggested Citation