Because of increasing technological complexity of new products, the manufacturers of final products more often seek access to external sources of knowledge at the early, market-distant stages of innovation processes. However, they are confronted with a specifically high danger of moral hazard. Traditional management instruments fail to control that danger mainly for two reasons. First, the supplier activities are not transparent. Second, market-distant R&D results are credence goods whose quality cannot be evaluated, not even ex post. It is the theory of incomplete contracts that solves the problem by allocating the so-called control rights to the supplier. These rights primarily regulate the assignment of the intellectual property rights, the control of the R&D process, and the marketing of the final products that are based on the delivered R&D results. To date, we do not have any empirical evidence about the relative effectiveness of these control rights. Moreover, studies on incomplete contracts in R&D alliances only focused on the collaboration between biotechnology and pharmaceutical firms. Our study fills these gaps. On the basis of a sample of French and German R&D suppliers, we find that only enforceable intellectual property rights assigned to the supplier effectively control moral hazard. a The direction of the responses was reversed prior to the analysis. M. KLOYER 464
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.