Effective Control Rights in Vertical R&D Collaboration

Because of increasing technological complexity of new products, the manufacturers of final products more often seek access to external sources of knowledge at the early, market-distant stages of innovation processes. However, they are confronted with a specifically high danger of moral hazard. Traditional management instruments fail to control that danger mainly for two reasons. First, the supplier activities are not transparent. Second, market-distant R&D results are credence goods whose quality cannot be evaluated, not even ex post. It is the theory of incomplete contracts that solves the problem by allocating the so-called control rights to the supplier. These rights primarily regulate the assignment of the intellectual property rights, the control of the R&D process, and the marketing of the final products that are based on the delivered R&D results. To date, we do not have any empirical evidence about the relative effectiveness of these control rights. Moreover, studies on incomplete contracts in R&D alliances only focused on the collaboration between biotechnology and pharmaceutical firms. Our study fills these gaps. On the basis of a sample of French and German R&D suppliers, we find that only enforceable intellectual property rights assigned to the supplier effectively control moral hazard. Copyright © 2011 John Wiley & Sons, Ltd.