| Abstract: |
The sale of R&D projects through licensing facilitates the division of labor
between research and development activities. This vertical specialization can
improve the overall efficiency of the innovative process. However, these gains
depend on the timing of the sale: the buyer of an R&D project should assume
development at the stage at which he has an efficiency advantage. We show that
in an environment where the seller is overconfident about the value of the
project, she may delay the sale to the more efficient firm in order to provide
verifiable information about its quality, though this delay implies higher
total development costs for the project. We obtain a condition for the
equilibrium timing of licensing and examine how factors such as the intensity
of competition between potential buyers influence it. We show that a wide
array of different explanations, based on differences in information, beliefs
or risk profiles, lead to the same qualitative results. We present empirical
evidence from pharmaceutical licensing contracts that is consistent with our
theoretical predictions. |