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Contractibility And The Design Of Research Agreements

In economics, contract theory examines how economic operators can and can design contractual agreements, usually in the case of information asymmetry. Because of its links both with the agency and with incentives, contract theory is often divided into an area known as law and economics. One of the most important applications is the design of executive compensation systems. In the field of economics, Kenneth Arrow was formally treated for the first time in the 1960s. In 2016, Oliver Hart and Bengt R. Holmström were awarded the Nobel Prize in Economics for their work on contract theory, which covers many topics ranging from CEO compensation to privatizations. Holmström (MIT) focused more on the link between incentives and risks, while Hart (Harvard) focused on the unpredictability of the future, which creates holes in contracts. [1] We analyse the impact of the contract on the design of contracts. Our empirical application is biotechnological research. One of the major concerns in the design of research contracts is that researchers contribute to other projects. We show that if the research activities are not contractable, an option contract is optimal. The company funding has the possibility to terminate the research contract and, in the event of termination, broad property rights. The threat of termination discourages researchers from cross-subsidizing and the costs of exercising the termination option deter the finance company from an opportunistic dismissal.

We are testing this forecast using a new dataset of 580 biotechnology research agreements. We find that contracts with a termination option are more common when the search is not compatible. We also analyze the difference between contract design and the financial constraints of the research firm and look at the role of uncertainty and asymmetric information about project quality or research capabilities. . . .