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A comparison of milestone contract and royalty contract under critical value criterion in R&D alliance

  • Yiping Fu
  • Zhihua ChenEmail author
  • Zhibing Liu
  • Shanxue Yang
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Abstract

This paper attempts to better understand contract type and risk attitude in R&D alliance under information asymmetry, that is, how the marketer designs and chooses optimal contract between royalty contract and milestone contract and how the innovator’s risk attitude and asymmetric information affect the marketer’s optimal contract strategies and profits. We use principal–agent models to formulate the marketer’s contracting problem under asymmetric information about the innovator’s innovation expertise and unobservable efforts. We find that, compared to the case under full information in both contracting structures, the marketer should distort the commission rate upwards under dual asymmetric information when the innovator is risk averse or downwards to lower innovation–expertise and risk-loving innovator; nevertheless, the marketer should offer the first-best contract. Furthermore, investigating the impacts of information asymmetry on the marketer’s profits under two information structures, we find that dual asymmetric information harms the marketer’s profit, especially when the innovator’s effort marginal efficiency is higher. Finally, by comparing the marketer’s profits in two types of contracts, we give the specific regions that milestone contract or royalty contract benefits the marketer better under different information structures.

Keywords

Milestone contract Royalty contract Critical value criterion Information asymmetry R&D alliance 

Notes

Acknowledgements

This work was supported by the National Natural Science Foundation of China (Grant Nos. 71771166, 71771165 and 11761025), Yanta Scholars Foundation of Xi’an University of Finance and Economics and Tianjin Natural Science Foundation (Grant No. 18JCQNJC04200).

Compliance with ethical standards

Conflict of interest

The authors declare that they have no conflict of interest.

Ethical approval

This article does not contain any studies with human or animal participants performed by any of the authors.

Informed consent

Informed consent is obtained from all individual participants included in the study.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  • Yiping Fu
    • 1
    • 2
  • Zhihua Chen
    • 1
    Email author
  • Zhibing Liu
    • 3
  • Shanxue Yang
    • 4
  1. 1.College of Management and EconomicsTianjin UniversityTianjinChina
  2. 2.College of Information Science and TechnologyHainan UniversityHaikouChina
  3. 3.College of Mathematics and PhysicsHuanggang Normal UniversityHubeiChina
  4. 4.School of StatisticsXi’an University of Finance and EconomicsXi’anChina

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