Niedermayer, Andras; Wu, Jianjun
(14. May 2013):
Breaking Up a Research Consortium.
SFB/TR 15 Discussion Paper No. 433
Inter-firm R&D collaborations through contractual arrangements have become increasingly
popular, but in many cases they are broken up without any joint discovery.
We provide a rationale for the breakup date in R&D collaboration agreements. More
specifically, we consider a research consortium initiated by a firm A with a firm B. B has
private information about whether it is committed to the project or a free-rider. We
show that under fairly general conditions, a breakup date in the contract is a (secondbest)
optimal screening device for firm A to screen out free-riders. With the additional
constraint of renegotiation proofness, A can only partially screen out free-riders: entry
by some free-riders makes sure that A does not have an incentive to renegotiate the
contract ex post. We also propose empirical strategies for identifying the three likely
causes of a breakup date: adverse selection, moral hazard, and project non-viability.