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Licensing Contracts: Control Rights, Options and Timing

Crama, P; De Reyck, B; Taneri, N; (2016) Licensing Contracts: Control Rights, Options and Timing. Management Science 10.1287/mnsc.2015.2386. Green open access

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Abstract

Research and development (R&D) collaborations, common in high-tech industries, are challenging to manage because of 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 buyout 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 because 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 significant influence 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.

Type: Article
Title: Licensing Contracts: Control Rights, Options and Timing
Open access status: An open access version is available from UCL Discovery
DOI: 10.1287/mnsc.2015.2386
Publisher version: http://dx.doi.org/10.1287/mnsc.2015.2386
Language: English
Additional information: Copyright © 2016, INFORMS.
Keywords: research and development; innovation; contract design; moral hazard
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: http://discovery.ucl.ac.uk/id/eprint/1476779
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