W e develop a model based on asymmetric information (adverse selection) that provides a rational explanation for the persistent use of royalties alongside equity in university technology transfer. The model shows how royalties, through their value-destroying distortions, can act as a screening tool that allows a less-informed principal, such as the university's Technology Transfer Office (TTO), to elicit private information from the more informed spin-off. We also show that equity-royalty contracts outperform fixed-fee-royalty contracts because they cause fewer value-destroying distortions. Furthermore, we show that our main result is robust to problems of moral hazard. Beside the coexistence result, the model also offers explanations for the empirical findings that equity generates higher returns than royalty and that TTOs willing to take equity in lieu of fixed fees are more successful in creating spin-offs.

Research and development (R&D) collaborations, common in high-tech industries, are challenging to manage due to technical and market risks as well as incentive problems. We investigate how control rights, options, payment terms and timing allow the innovator to capture maximum value from its R&D collaborations with a marketer. Our study reveals a counterintuitive result; the innovator may, under certain conditions, prefer to grant launch control rights or buy-out options to the marketer despite the fact that both terms restrict its downstream actions. We demonstrate that a menu of contracts is not necessary to address the adverse selection problem as the menu can be replicated by a single option contract. We show that timing, through renegotiation or delayed contracting, as well as the careful allocation of control rights and options can have a signicant inuence on the value of collaborative R&D. We provide recommendations on the optimal contract structure and timing based on two project characteristics, novelty of the R&D process and market-potential variability.

Alliances for new product development have been studied extensively in the operations management literature. Alliances between an innovator and a partner create value by utilizing their complementary capabilities. In this paper, we seek to understand what drives the alliance structure: the choice between collaborative alliances where the parties exert joint efforts and sequential alliances where, for the most part, the partner takes over going forward. Our analysis of a data set of over 2,000 biopharmaceutical alliances reveals our main finding: a key role of operational choices is to address contract theoretic concerns faced by an alliance. We also find that aligning the choice with predictions based on contract theory has consequences for performance. Therefore, our analysis not only has descriptive power about the drivers of alliance choice, but also provides valuable insight into the performance and eventual fate of alliances formed. The online appendix is available at https://doi.org/10.1287/msom.2017.0617 .

W e develop a model based on asymmetric information (adverse selection) that provides a rational explanation for the persistent use of royalties alongside equity in university technology transfer. The model shows how royalties, through their value-destroying distortions, can act as a screening tool that allows a less-informed principal, such as the university's Technology Transfer Office (TTO), to elicit private information from the more informed spin-off. We also show that equity-royalty contracts outperform fixed-fee-royalty contracts because they cause fewer value-destroying distortions. Furthermore, we show that our main result is robust to problems of moral hazard. Beside the coexistence result, the model also offers explanations for the empirical findings that equity generates higher returns than royalty and that TTOs willing to take equity in lieu of fixed fees are more successful in creating spin-offs.

Problem definition: In theory, all coordinating contracts are equivalent; however, the minimum order quantity (MOQ) contract is observed to be more popular in practice. We seek to understand whether decision makers as suppliers can perform better with the MOQ contract and, if so, why. We also study whether MOQ is indeed the preferred contract when subjects are allowed to choose among coordinating contracts. Academic/practical relevance: The behavioral operations management literature has established a trade-off between complex coordinating and simple noncoordinating contracts. This paper fills a gap in the literature by studying whether and how the coordinating MOQ contract attenuates this trade-off. Methodology: First, we test whether subjects in the role of suppliers given only a single contract type can optimize its parameters. Second, we introduce treatments where the coordinating contracts subject to demand risk are hedged such that risk is eliminated. Third, we repeat two of the initial sets of treatments with a cognitive load survey and introduce single-variable versions of those treatments to reduce cognitive burden. Fourth, we introduce a novel experimental design where, in each period, subjects choose both the type of contract to offer and the parameters of that contract. Results: We find that (i) subjects perform significantly better with the MOQ contract compared with other coordinating contracts; (ii) this can be attributed to the risk inherent in and cognitive burden induced by those contracts; and (iii) subjects choose the MOQ contract more frequently over theoretically equivalent coordinating contracts. Managerial implications: We show that the trade-off between efficiency and complexity can be mitigated by simpler yet efficient contracts. Hence, there is considerable benefit to identifying contractual mechanisms that ameliorate the adverse effects of complexity. This explains the prevalence of MOQ terms in supply contracts.