Effective incomplete contracts and milestones in market-distant R&D collaboration

R&D outsourcing is often conducted during the early, market-distant stages of the innovation process. However, the main obstacle to this potentially efficient interfirm specialization is the high danger of moral hazard. Most organizational mechanisms fail to control that type of opportunism because of information asymmetries, even ex post. In the theory of incomplete contracts, this problem is mitigated by assigning the control rights to the supplier. To date, empirical studies have mainly investigated the interfirm distribution of the control rights. However, we do not know yet which concrete control right is crucial with regard to supplier opportunism, which is the decisive dependent variable. Our study addresses this research gap. For the first time, we extend the empirical focus from biotechnology and pharmaceutical firm alliances to a cross-industry sample of 113 collaboration cases. The results show the effectiveness of contracts that ex ante assign patent ownership rights to the supplier. The findings are also relevant for management practice because the majority of practitioners do not use this contract type yet, although there is no sign of an effective alternative.

► We analyze the specific moral hazard problem in ad-hoc, market-distant, inter-firm collaboration.
► We analyze the relevance and applicability of potential organizational instruments in this case.
► We give reasons for the assumption that the theoretical model of incomplete contracts can be effectively implemented by an ex-ante in-principle-assignment of patent ownership rights to the supplier.
► In our study of 113 cross-sectional cases, we test this assumption for the first time, and find it confirmed.
► The results also show the ineffectiveness of the instrument of milestone-dependent payments that was tested because of its widespread usage in management practice.