99-007
WEAK PROPERTY RIGHTS AND HOLD-UP IN R&D
Bharat Anand and Alexander Galetovic
We study how the equilibrium organization and financing of R&D varies
according to the ease with which property rights over knowledge can be
specified. We examine various methods of organization that appear to be
common in practice (e.g., corporate R&D, seed-stage venture capital finance
followed by corporate acquisitions, and venture capital-backed R&D), and
show that each of these can emerge in equilibrium. There are four main
results of interest. First, even when knowledge is embodied in human
capital and property rights over this knowledge are weak, firms may be able
to capture the value created from the innovations they finance. Thus, weak
property rights need not deter innovation. Second, the particular
organization that emerges in equilibrium need not be efficient. Third,
local spillovers and stronger product market competition increase the
likelihood that research projects will be financed and undertaken. This
second-best result suggests that when there is more than one
appropriability problem, they may neutralize each other instead of adding
up. Finally, we show that in equilibrium venture capitalists tend to
finance projects that are more profitable than those financed by corporations.
C&S
36 pages
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