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On contracting for uncertain R&D

Author

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  • Rajeev K. Goel

    (Department of Economics, Illinois State University, Normal, IL, USA)

Abstract

Using a two-stage model, this paper studies auctions of research and development (R&D) contracts when the outcome of research is uncertain. The agent is contracted by the principal to invent a new product or a new process. The principal selects the most capable agent through an auction and writes an incentive contract with the winning agent to share risks. The main finding of the paper is that the generally superior incentive contracts might not be desirable under plausible conditions in R&D contracting. In particular, we find that the principal prefers a cost-plus contract in cases of large R&D projects or rising innovation benefits, but would prefer a fixed-price contract when the number of bidders increases. An alternate elasticity interpretation of results holds promise for empirical analysis. Public policy implications are finally discussed. Copyright © 1999 John Wiley & Sons, Ltd.

Suggested Citation

  • Rajeev K. Goel, 1999. "On contracting for uncertain R&D," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(2), pages 99-106.
    • Handle: RePEc:wly:mgtdec:v:20:y:1999:i:2:p:99-106
    DOI: 10.1002/(SICI)1099-1468(199903)20:2<99::AID-MDE920>3.0.CO;2-W
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    References listed on IDEAS

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    Cited by:

    1. Zhang, Heng & Yang, Ming & Bao, Jiye & Gong, Pu, 2013. "Competitive investing equilibrium under a procurement mechanism," Economic Modelling, Elsevier, vol. 31(C), pages 734-738.
    2. Akhundjanov, Sherzod B. & Gallardo, R. Karina & McCluskey, Jill J. & Rickard, Bradley J., 2020. "Commercialization of a demand-enhancing innovation: The release of a new apple variety by a public university," Economic Modelling, Elsevier, vol. 86(C), pages 88-100.
    3. Dirk Dohse & Rajeev K. Goel & Michael A. Nelson, 2019. "What induces firms to license foreign technologies? International survey evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 40(7), pages 799-814, October.
    4. Rajeev Goel, 2001. "R&D effects of incomplete procurement contracts," Applied Economics Letters, Taylor & Francis Journals, vol. 8(11), pages 697-699.
    5. Martin, Stephen & Scott, John T., 2000. "The nature of innovation market failure and the design of public support for private innovation," Research Policy, Elsevier, vol. 29(4-5), pages 437-447, April.

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