UCL School of Management is delighted to welcome Dr Niyazi Taneri, NUS, to host a research seminar discussing ‘Turning the Tables in R&D Licensing Contracts’.
Research and development (R&D) collaborations between an innovator and her partner are often undertaken when neither party can bring the product to market individually, which makes a joint effort necessary to create value. However, R&D’s uncertain nature complicates the monitoring of effort and so moral hazard reduces the collaboration’s value. Either party can avoid this outcome by acquiring their missing capability and taking sole ownership of the project. These dynamic capabilities bring about two types of risks – about whether the other party’s capability will be acquired and about how well it will be implemented. We find that the extent of these two risks determine the optimality of delaying contracting, or signing contracts with buyout and buyback options, a baseball arbitration clause, or a novel, reciprocal option. Baseball arbitration and reciprocal options are unique in two ways: (i) unlike a typical option contract, which has a predetermined strike price, they allow either party to determine the buyout price at the time of their offer; (ii) and they allow the recipient of the offer to turn the tables on the other party. While baseball arbitration and reciprocal option contracts address inefficient joint development and product allocation outcomes, they also entail their own inefficiencies due to strategic behavior of the two parties: the best choice of contract is determined by trade-offs between these inefficiencies. Our model explores the similarities between the baseball arbitration and reciprocal option contract, and proposes a modification that would increase the profitability of the reciprocal option contract.