MORAL HAZARD AND OPTIMAL-CONTRACT FORM FOR R-AND-D COOPERATION

This paper aims to explain the use of different governance modes for R&D cooperation. We argue that (ex ante) cross-licensing agreements are preferred to R&D joint ventures if potential synergy effects are negligible and the double moral hazard problem caused by unobservable R&D effort can be solved by an appropriate royalty scheme. It is shown that the first best effort decisions are implementable by a cross-licensing agreement if royalty payments are based on R&D success. However, if the payments have to be based on actual know-how transfer because R&D success is not verifiable, there are cases where joint ventures are necessary to induce optimal R&D effort.