Galetovic, Alexander: Weak Property Rights and Hold-up in R & D
World Conference Econometric Society, 2000, Seattle

Bharat Anand, Harvard University
Alexander Galetovic, Universidad de Chile
Weak Property Rights and Hold-up in R & D
Session: C-5-20  Sunday 13 August 2000  by Galetovic, Alexander
We study how the life cycle of R&D finance varies according to the ease with which property rights over knowledge can be defined. There are two financiers, a venture capitalist and a corporation. While the venture capitalist can commit to any arbitrary surplus sharing rule the corporation cannot. The knowledge acquired in costly research becomes embodied in the researcher's human capital, and she may hold-up the financier and walk away with the project to develop it elsewhere.
The main results are: (a) When property rights are strong research is always funded by the VC, development is performed efficiently and breakaways from the VC to the corporation are observed in equilibrium. (b) When property rights are weak either the corporation or the VC finance both research and development or the project gets no funding. (c) When property rights are weak the corporation's inability to commit to a sharing rule\ does not affect the life-cycle of R&D finance. (d) When property rights are weak local spillovers and strong product market competition increase the likelihood that research projects will get funding. (e) The equilibrium life-cycle of R\&D finance need not be first-best efficient. (f) In equilibrium and controlling for the strength of property rights, VCs finance projects that are more profitable on average.

File created by Jurgen Doornik with eswc2000.ox on 2-01-2001