Incentive Contract in R&D Outsourcing Under Asymmetric Information: A Moral Hazard Framework

The incentive problem in research and development (R&D) outsourcing is studied. In view of two payment schemes i.e., initial fixed payment scheme and gain-sharing scheme, we applied the principal-agent theory to our analysis and proposed a moral hazard model. The results show that the optimal contract includes not only initial payment but also gain-sharing scheme. Furthermore, our results reveal that there exists a threshold value of the initial payment under asymmetric information: when the initial payment is less than this threshold value, the more the initial payment, the lower the gain-sharing scheme and vice versa; but when the initial payment exceeds this threshold value, the gain- sharing scheme remains constant no matter how the initial payment varies. Finally, the results show that the firm loses partial profits for lack of information under asymmetric information. The agent may gain information rents owing to information advantage and trade efficiency decreases.