American Economic Review: Vol. 100 No. 1 (March 2010)


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Contractibility and the Design of Research Agreements

Article 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.100.1.214


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)

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Lerner, Josh (Harvard U)
Malmendier, Ulrike (U CA, Berkeley)

JEL Classifications

D86: Economics of Contract: Theory
L65: Chemicals; Rubber; Drugs; Biotechnology
O31: Innovation and Invention: Processes and Incentives
O34: Intellectual Property Rights

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