E-resources
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Lerner, Josh; Malmendier, Ulrike
The American economic review, 03/2010, Volume: 100, Issue: 1Journal Article
We analyze how contractibility affects contract design. A major concern when designing research agreements is that researchers use their funding to subsidize other projects. We show that, when research activities are not contractible, an option contract is optimal. The financing firm obtains the option to terminate the agreement and, in case of termination, broad property rights. The threat of termination option deters the financing firm from opportunistic termination. We test this prediction using 580 biotechnology research agreements. Contracts with termination options are more common when research is non-contractible.
