On Contracting for Uncertain R&D

Managerial and Decision Economics, vol. 20 no.2, pp. 99-106, 1999

Posted: 28 Sep 2014 Last revised: 5 Apr 2016

See all articles by Rajeev K. Goel

Rajeev K. Goel

Illinois State University - Department of Economics

Date Written: 1999

Abstract

Using a two-stage model, this paper studies auctions of research and development (R&D) contracts when the outcome of research is uncertain. The agent is contracted by the principal to invent a new product or a new process. The principal selects the most capable agent through an auction and writes an incentive contract with the winning agent to share risks. The main finding of the paper is that the generally superior incentive contracts might not be desirable under plausible conditions in R&D contracting. In particular, we find that the principal prefers a cost-plus contract in cases of large R&D projects or rising innovation benefits, but would prefer a fixed-price contract when the number of bidders increases. An alternate elasticity interpretation of results holds promise for empirical analysis. Public policy implications are finally discussed.

Note: Copyright © 1999 John Wiley & Sons, Ltd.

Suggested Citation

Goel, Rajeev K., On Contracting for Uncertain R&D (1999). Managerial and Decision Economics, vol. 20 no.2, pp. 99-106, 1999. Available at SSRN: https://ssrn.com/abstract=2501598

Rajeev K. Goel (Contact Author)

Illinois State University - Department of Economics ( email )

Normal, IL 61790-4200
United States

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