Weak Property Rights and Holdup in R&D
We study how the sequence of .nancing of R&D varies according to the ease with which property rights over knowledge can be de.ned. There are two .nanciers: a venture capitalist (VC) and a corporation. The knowledge acquired in costly research becomes embodied in the researcher’s human capital, and she may hold up the .nancier and walk away with the project to develop it elsewhere. The main results are: (1) When property rights are strong, research is always funded by the VC, development is performed ef.- ciently, and breakaways from the VC to the corporation are observed in equilibrium. (2) When property rights are weak, projects may be .nanced by the VC or the corporation, or may remain unfunded. (3) When property rights are weak, no breakaways occur in equilibrium; local spillovers and strong product market competition increase the likelihood that research projects will get funding. (4) The equilibrium sequence of R&D .nance need not be .rstbest ef.cient. (5) In equilibrium, and controlling for the strength of property rights, VCs .nance projects that are more pro.table on average.