Abstract:     A two-period moral hazard model with the sequential investment in the R&D alliance is studied. This moral hazard model is based on the price and cost that are two key factors affecting the R&D value. The governance structures in R&D alliance under exclusive or joint ownership and option contracts are analyzed and compared, the investment decisions of firm A and firm B, and the effect of key parameters on their first-best investment levels are discussed. Finally, it is proved that option contract strictly dominates other ownership structure. The results offer a theoretical explanation why partners in the R&D alliance frequently use contingent ownership structures to govern their relationship, and why their initial arrangement is often modified over the time.    

Key words: R&D alliance, moral hazard, exclusive ownership, joint ownership, option contract