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Residual income claimancy, monitoring, and the R&D firm: Theory with application to biotechs
Author(s) -
Chang Koyin,
Garen John
Publication year - 2004
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1179
Subject(s) - incentive , residual , maturity (psychological) , organizational structure , process (computing) , industrial organization , passive income , residual risk , focus (optics) , business , economics , microeconomics , public economics , management , computer science , psychology , tax reform , algorithm , state income tax , gross income , optics , operating system , developmental psychology , physics
This paper models the assignment of residual income claimancy to an R&D manager and applies the model to biotechnology firms. Residual income claimancy provides incentives for the manager to monitor the R&D process. Since the nature of R&D and of monitoring scientific effort is different, our model predicts stark differences in the residual income claimancy of managers and in other aspects of organization for innovative R&D firms like biotechs. In particular, R&D firms are expected to be more owner‐managed, more expert‐managed, and smaller in size. Cross‐sectional data on biotechnology firms is consistent with these implications. Additionally, longitudinal data indicate that as firms alter their focus on biotech research, their organizational structure changes as expected. Our approach suggests a process of firm and industry evolution related to technological maturity and points to the importance of incentives rather than risk sharing in determining organizational form, similar to the original analysis of franchising. Copyright © 2004 John Wiley & Sons, Ltd.