Incomplete contracts and control premiums

Here we present the key insights from the finance literature on incomplete contracts and control premiums, or decision rights, in the generation of private and public goods that emerge from the research and development process. A contract is incomplete if there is a set of events that can influence the partnership that has not been anticipated and addressed in the initial contract. The allocation of control rights through a public–private partnership (PPRP) contract can determine whether a partnership achieves efficiency as well as an equitable distribution of partnership benefits. We present the optimal allocation of control rights among the parties and review both theoretical and empirical literature on incomplete contracting. This literature supports the notion that control rights are a crucial issue in public–private research agreements and that the balance of these rights should be tied to the valuation, and hence overall objectives, of the PPRP.