A comparison of Milestone-based and buyout options contracts for coordinating R&D partnerships

• Autores: Shantanu Bhattacharya, Vibha Gaba, Sameer Hasija
• Localización: Management science: journal of the Institute for operations research and the management sciences, ISSN 0025-1909, Vol. 61, Nº. 5 (May 2015), 2015, págs. 963-978
• Idioma: inglés
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• Resumen

  • We analyze optimal contractual arrangements in a bilateral research and development (R&D) partnership between a risk-averse provider that conducts early-stage research followed by a regulatory verification stage and a risk-neutral client that performs late-stage development activities, including production, distribution, and marketing. The problem is formulated as a sequential investment game with the client as the principal, where the investments are observable but not verifiable. The model captures the inherent incentive alignment problems of double-sided moral hazard, risk aversion, and holdup. We compare the efficacy of milestone-based options contracts and buyout options contracts from the client's perspective and identify conditions under which they attain the first-best outcome for the client. We find that milestone-based options contracts always attain the first-best outcome for the client when the provider has some bargaining power in renegotiation and identify their applicability to different R&D partnerships.