Abstract

Research and development (R&D) collaborations between an innovator and her partner are often undertaken when neither party can bring the product to market individually, which makes a joint effort necessary to create value. However, R&D’s uncertain nature complicates the monitoring of effort and so moral hazard reduces the collaboration’s value. Either party can avoid this outcome by acquiring their missing capability and taking sole ownership of the project. These dynamic capabilities bring about two types of risks – about whether the other party’s capability will be acquired and about how well it will be implemented. We find that the extent of these two risks determine the optimality of delaying contracting, or signing contracts with buyout and buyback options, a baseball arbitration clause, or a novel, reciprocal option. Baseball arbitration and reciprocal options are unique in two ways: (i) unlike a typical option contract, which has a predetermined strike price, they allow either party to determine the buyout price at the time of their offer; (ii) and they allow the recipient of the offer to turn the tables on the other party. While baseball arbitration and reciprocal option contracts address inefficient joint development and product allocation outcomes, they also entail their own inefficiencies due to strategic behaviour of the two parties: the best choice of contract is determined by trade-offs between these inefficiencies. Our model explores the similarities between the baseball arbitration and reciprocal option contract, and proposes a modification that would increase the profitability of the reciprocal option contract.

Speaker Bio

Niyazi Taneri is an Assistant Professor of Analytics & Operations at NUS Business School, National University of Singapore (NUS). Prior to NUS, he worked at Tesco as an Operations Analyst and at the Engineering Systems & Design Pillar of Singapore University of Technology & Design, where he was also the SUTD-lead of the Decision Making Research Thrust for the MIT-SUTD International Design Centre. He has held visiting positions at Singapore Management University, Massachusetts Institute of Technology, and INSEAD. He holds a BSc Degree in Industrial Engineering from the University of Wisconsin – Madison, and Master’s and PhD Degrees from the University of Cambridge Judge Business School. His research is broadly in the area of Operations Management with an emphasis on using analytical tools for the study of strategic interactions for innovation, sustainability and supply chain management. His papers have been published in leading journals such as Management Science, and Manufacturing & Service Operations Management. Niyazi teaches courses in the EMBA, Undergraduate and Executive Education Programs on and Data Analytics, Operations, Supply Chains, and Logistics. He received the ISPIM-Wiley Best PhD Dissertation in Innovation Management Award and SUTD’s Excellence in Teaching Award.

For more information about the ESD Seminars Series, please contact Karthyek Murthy at karthyek_murthy@sutd.edu.sg.