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Agency and strategic contracts: theory and evidence from R&D agreements in the pharmaceutical industry

Guo, Di; Hua, Xinyu; Jiang, Kun

Authors

Di Guo

Xinyu Hua

Kun Jiang



Abstract

We examine the use of strategic rights in research and development (R&D) agreements between a client and an agent, when an entrant may compete with the client for the license of non-contracted discoveries developed by the agent. The agent puts effort either in the contracted project, or into other R&D activities which can result in non-contracted discoveries. Strategic rights help the client and the agent extract rent from the entrant, and also motivate the agent to place effort into the contracted project. Accordingly, firms are more likely to adopt strategic rights when the likelihood of entry is larger. Moreover, strategic rights and termination rights are substitutes in mitigating agency problems. By investigating R&D agreements between pharmaceutical clients and bio-tech agents, we find consistent evidence of the positive impact of entry threat on the use of strategic rights, as well as evidence of the substitution between strategic rights and termination rights.

Journal Article Type Article
Publication Date Sep 30, 2017
Journal International Journal of Industrial Organization
Print ISSN 0167-7187
Electronic ISSN 1873-7986
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 54
APA6 Citation Guo, D., Hua, X., & Jiang, K. (2017). Agency and strategic contracts: theory and evidence from R&D agreements in the pharmaceutical industry. International Journal of Industrial Organization, 54, doi:10.1016/j.ijindorg.2017.06.007
DOI https://doi.org/10.1016/j.ijindorg.2017.06.007
Keywords Agency; Entry threat; Strategic right; Termination
Publisher URL https://doi.org/10.1016/j.ijindorg.2017.06.007
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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