Breaking Up a Research Consortium

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

Project Finance as a Risk-Management Tool in International Syndicated Lending

We develop a double moral hazard model that predicts that the use of project finance increases with both the political risk of the country in which the project is located and the influence of the lender over this political risk exposure. In contrast, the use of project finance should decrease as the economic health and corporate governance provisions of the borrower’s home country improve. When we test these predictions with a global sample of syndicated loans to borrowers in 139 countries, we find overall support for our model and provide evidence that multilateral development banks act as “political umbrellas”

Economic Incentives and Social Preferences: A Preference-based Lucas Critique of Public Policy

Policies and explicit private incentives designed for self-regarding individuals sometimes are less effective or even counterproductive when they diminish altruism, ethical norms and other social preferences. Evidence from 51 experimental studies indicates that this crowding out effect is pervasive, and that crowding in also occurs. A model in which self-regarding and social preferences may be either substitutes or complements is developed and evidence for the mechanisms underlying this non-additivity feature of preferences is provided. The result is a preference-based analogue to the Lucas Critique restricting feasible implementation to allocations that are supportable given the effect of incentives on preferences.public goods, behavioural experiments, social preferences, second best, motivational crowding, explicit incentives

Are older workers overpaid? A literature review

It is widely believed that wage and productivity profiles of individual workers do not coincide at all ages. We give an overview of the theories which provide a rationale for this, and discuss the empirical literature. Human capital theories typically imply that wages rise with tenure, so that job reallocation at old age would imply a wage cut. Incentive theories typically imply that wages exceed productivity at the end of a worker's career. Bargaining power of unions may also lead to 'overpayment' of older workers. Some general conclusions regarding the wages of older workers are formulated on the basis of the authors' reading of the empirical literature.

Contractibility and the Design of Research Agreements

We analyze how variations in contractibility affect the design of contracts in the context of biotechnology research agreements. A major concern of firms financing biotechnology research is that the R&D firms might use the funding to subsidize other projects or substitute one project for another. We develop a model based on the property-rights theory of the firm that allows for researchers in the R&D firms to pursue multiple projects. When research activities are non-verifiable, we show that it is optimal for the financing company to obtain the option right to terminate the research agreement while maintaining broad property rights to the terminated project. The option right induces the biotechnology firm researchers not to deviate from the proposed research activities. The contract prevents opportunistic exercise of the termination right by conditioning payments on the termination of the agreement. We test the model empirically using a new data set on 584 biotechnology research agreements. We find that the assignment of termination and broad intellectual property rights to the financing firm occurs in contractually difficult environments in which there is no specifiable lead product candidate. We also analyze how the contractual design varies with the R&D firm's financial constraints and research capacities and with the type of financing firm. The additional empirical results allow us to distinguish the property-rights explanation from alternative stories, based on uncertainty and asymmetric information about the project quality or research abilities.

A Model of R&D Valuation and the Design of Research Incentives

We develop a real options model of R&D valuation, which takes into account the uncertainty in the quality of the research output, the time and cost to completion, and the market demand for the R&D output. The model is then applied to study the problem of pharmaceutical under-investment in R&D for vaccines to treat diseases affecting the developing regions of the world. To address this issue, world organizations and private foundations are willing to sponsor vaccine R&D, but there is no consensus on how to administer the sponsorship effectively. Different research incentive contracts are examined using our valuation model. Their effectiveness is measured in the following four dimensions: cost to the sponsor, the probability of development success, the consumer surplus generated and the expected cost per person successfully vaccinated. We find that, in general, purchase commitment plans (pull subsidies) are more effective than cost subsidy plans (push subsidies), while extending patent protection is completely ineffective. Specifically, we find that a hybrid subsidy constructed from a purchase commitment combined with a sponsor co-payment feature produces the best results in all four dimensions of the effectiveness measure.

Low-powered incentives

We study low-powered incentives in a model that captures important features of workplaces in which incentive-pay approaches are minimally relevant. Our motivation is that incentive pay, while not rare, is clearly far less common than are agency problems: many firms with agency problems nonetheless pay fixed compensation and offer continued employment to all but those workers judged "unsatisfactory" according to largely subjective criteria. We find that low-powered incentives can achieve efficient outcomes in simple workplaces and function surprisingly well even when the environment is characterized by unobservable performance heterogeneity and a high degree of complementarity among workers.Wages

Convertible securities and venture capital finance

Venture capital financing relies heavily on convertible securities; the most common type is convertible preferred stock. Venture capital contracts also specify control rights that describe who gets to make the firm's decisions. The recent literature has provided some theoretical explanations for the use of these two features. Underlying these explanations is the idea that individuals can take actions that affect the firm's performance but that these actions cannot be specified in a contract. In this article, Yaron Leitner focuses on venture capital contracts, but the ideas presented can be applied to other contracting problems in which individuals must be given incentives to take appropriate actions.Venture capital ; Securities ; Contracts

The Excess Sensitivity of Layoffs and Quits to Demand

Excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements: the specific nature of worker-firm relations creates a situation of bilateral monopoly. Institutions which have arisen to avert the associated inefficiency cannot mimic the separation decisions of a perfect-information, first-best allocation rule. Simple employment rules based on predetermined or indexed wages are in many cases the most desirable among the class of feasible employment arrangements. More complicated contracts which seem to deal more effectively with turnover issues are either infeasible because of informational requirements or create adverse incentives on some other dimension.