Due Diligence, Research Joint Ventures, and Incentives to Innovate
33 Pages Posted: 23 Jun 2010 Last revised: 7 Sep 2011
Date Written: September 4, 2011
The decision to cooperate within R&D joint ventures is often based on `expert advice.' Such advice typically originates in a due diligence process, which assesses the R&D joint venture's profitability, for example, by appraising the achievability of synergies. We show that if the experts who advise the owners considering forming an R&D joint venture are also responsible for R&D efforts, they can have incentives to withhold information about the extent of those synergies. Owners optimally react by reducing the incentives to innovate in low-value projects developed within R&D joint ventures and in high-value projects developed within competing research organizations.
Keywords: Research and development, due diligence, experts' advice, joint venture, synergies, asymmetric information, moral hazard, information withholding (concealing) and revelation
JEL Classification: D82, D86, L5, L24, O31, O32, O38
Suggested Citation: Suggested Citation