Control and contract design in research collaborations: a complete contracts perspective

Incumbent firms, especially in high-tech industries, often contract and collaborate with small research units on single projects. A delicate resulting contracting decision thus is how to allocate control. This paper considers the incumbent's problem to design a research contract that specifies: the allocation of control; the unit's research input, and its monetary compensation. Contracting is complicated by the unit's private information about its technological skills; research outputs also are not verifiable. Control affects the distribution of the private benefits from research and can be shared. From a complete contracts perspective, an allocation of control that is contingent on the unit's reported information provides the incumbent an additional instrument for designing the incentives. Control can generate countervailing incentives and mitigate the limitations of contracts in research environments, to the point of extracting the full surplus. The analysis further clarifies when control is centralized by the incumbent, when it is shared between the parties, and when it is delegated to the unit.