A model of R&D valuation and the design of research incentives |
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Affiliation: | 1. Management School, Hefei University of Technology, Hefei, Anhui, 230009 China;2. School of Business, Central South University, Changsha, Hunan, 410083 China;3. School of Management, University of Science and Technology of China, Hefei, Anhui, 230026 China;4. School of Business, Jiangnan University, Wuxi, Jiangsu, 214122 China |
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Abstract: | We develop a real options model of R&D valuation that takes into account the uncertainty in the quality (or efficacy) of the research output, the time and cost to completion, and the market demand for the R&D output. The model is then applied to study the problem of pharmaceutical under-investment in R&D for vaccines to treat diseases affecting the developing regions of the world. To address this issue, world organizations and private foundations are willing to sponsor vaccine R&D, but there is no consensus on how to administer the sponsorship effectively. Different research incentive contracts are examined using our valuation model. Their effectiveness is measured in the following five dimensions: expected cost to the sponsor, probability of development success, consumer surplus generated, expected number of successful vaccinations and expected cost per person successfully vaccinated. We find that, in general, purchase commitment plans (pull subsidies) are more effective than cost subsidy plans (push subsidies). Moreover, we find that a hybrid subsidy plan constructed from a purchase commitment combined with a sponsor research cost-sharing subsidy is the most effective. |
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