Residual Income Claimancy, Monitoring, and the R&D Firm: Theory with Application to Biotechs

Abstract

This paper models the assignment of residual income claimancy to an R&D manager and applies the model to biotechnology firms. Residual income claimancy provides incentives for the manager to monitor the R&D process. Because the nature of R&D and of monitoring scientific effort is different, our model predicts stark differences in the residual income claimancy of managers and in other aspects of organization for innovative R&D firms like biotechs. In particular, R&D firms are expected to be more owner-managed, more expert-managed, and smaller in size. Cross-sectional data on biotechnology firms is consistent with these implications. Additionally, longitudinal data indicate that as firms alter their focus on biotech research, their organizational structure changes as expected.

Keywords: monitoring, residual income claimancy, R&D, biotechs, incentives and organizations

JEL Classification: L20, D20