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A Comparison Of Milestone-Based And Buyout Options Contracts For Coordinating R&D Partnerships, Shantanu Bhattacharya, Vibha Gaba, Sameer Hasija

Research Collection Lee Kong Chian School Of Business

We analyze optimal contractual arrangements in a bilateral research and development (R&D) partnership between a risk-averse provider that conducts early-stage research followed by a regulatory verification stage and a risk-neutral client that performs late-stage development activities, including production, distribution, and marketing. The problem is formulated as a sequential investment game with the client as the principal, where the investments are observable but not verifiable. The model captures the inherent incentive alignment problems of double-sided moral hazard, risk aversion, and holdup. We compare the efficacy of milestone-based options contracts and buyout options contracts from the client's perspective and identify conditions under …