Step by step. The benefits of stage-based R&D licensing contracts

Abstract

Step by step.The benefits of stage-based R&D licensing contracts. AbstractWe examine how a licensor can optimally design licensing contracts for multi-phase R&D projects when he does not know the licensee's project valuation, leading to adverse selection, and cannot enforce the licensee's effort level, resulting in moral hazard. We focus on the effect of the phased nature typical of such projects, and compare single-phase and multi-phase contracts. We determine the optimal values for the upfront payment, milestone payments and royalties, and the optimal timing for outlicensing. Including multiple milestones and accompanying payments can be an effective way of discriminating between licensees holding different valuations, without having to manipulate the royalty rate, which induces licensees to invest less, resulting in lower project values and socially suboptimal solutions. Interestingly, we also find that multiple milestone payments are beneficial even when the licensor is risk-averse, contrary to standard contract theory results, which recommend that only an upfront payment should be used. In terms of licensing timing, we show that the optimal time depends on the licensor's risk aversion, the characteristics of the licensee and the project value.

Modeling sequential R&D investments: a binomial compound option approach

“…Instead, sequential R&D investment projects comprising a series of more than just two payments have to be valued as compound real options, that is, options on options (Cassimon et al 2004;Lee et al 2008;Pennings and Sereno 2011). We focus exclusively on compound call options as they mirror the iterative multistage R&D management decision process (Crama et al 2013;Ghosh and Marvin 2012;Kort et al 2010) and are thus the most appropriate for modeling sequential R&D investments. Option pricing models are based on a perfect market assumption (Black and Scholes 1973;Cox et al 1979).…”

Contract and incentive mechanism in low-carbon R&D cooperation

“…Another extension is letting the R&D researcher be the leader of the game, for example Phytopharm, a biotechnology company based in Cambridge shire, England, looked for a partner to develop the product and launched it in the market (Crama et al , 2013). The screening game in this paper will be changed to the signal game.…”

Quantity and collection decisions in a closed-loop supply chain with technology licensing

“…Since then, there have been numerous studies on technology licensing (e.g., Rockett, 1990;Mukherjee and Pennings, 2006;Lin and Kulatilaka, 2006;Arora et al, 2013;Crama et al, 2013;Avagyan et al, 2014;Bagchi and Mukherjee, 2014;Erkal and Minehart, 2014;and Zhao et al, 2014). For example, Rockett (1990) studies the optimal technology licensing strategy in a duopoly market, and he finds that in the industries with lower imitation costs and with products that are easier to imitate, a fixed fee licensing dominates royalty licensing.…”