American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Contractibility and the Design of Research Agreements
American Economic Review
vol. 100,
no. 1, March 2010
(pp. 214–46)
Abstract
We analyze how contractibility affects contract design. A major concern when designing research agreements is that researchers use their funding to subsidize other projects. We show that, when research activities are not contractible, an option contract is optimal. The financing firm obtains the option to terminate the agreement and, in case of termination, broad property rights. The threat of termination deters researchers from cross-subsidization, and the cost of exercising the termination option deters the financing firm from opportunistic termination. We test this prediction using 580 biotechnology research agreements. Contracts with termination options are more common when research is non-contractible. (JEL D86, L65, O31, O34)Citation
Lerner, Josh, and Ulrike Malmendier. 2010. "Contractibility and the Design of Research Agreements." American Economic Review, 100 (1): 214–46. DOI: 10.1257/aer.100.1.214Additional Materials
JEL Classification
- D86 Economics of Contract: Theory
- L65 Chemicals; Rubber; Drugs; Biotechnology
- O31 Innovation and Invention: Processes and Incentives
- O34 Intellectual Property Rights