Market response to FDA announcements

This study investigates announcement effects at four points in the Food and Drug Administration (FDA) review process and explores conditions that may impact final approval. We show that investors adjust expectations through the approval process, and most uncertainty is resolved by final approval. While smaller firms reap benefit from the approval, the market penalizes first movers. We do not find additional gain for pioneering research, implying that these firms may be able to reduce R&D spending.     

Regulatory Reform and Bureaucratic Responsiveness to Firms: the Impact of User Fees in the FDA

This paper examines the impact of user fees on the speed of new-drug review and on the responsiveness of FDA reviewers to pharmaceutical firms. User fees are expected to alter FDA behavior and responsiveness to pharmaceutical firms because they give regulators a financial incentive to process more new-drug applications and because they convey information to regulators that may reduce type I error. The analysis examines the variation in FDA review times for new drugs approved between 1990 and 1995 as a function of differences that exist among firms and drugs. Specifically, it compares estimates of regulator responsiveness to several firm and drug characteristics before and after the introduction of user fees. The results show that user fees produced a significant change in FDA behavior. Regulators have become less responsive to the differences among firms since the introduction of user fees, which suggests that the reform has led to more equity in the new-drug review process. In addition, the FDA has expedited the review of new drugs, especially the most therapeutically novel drugs, which suggests that politicians have been fairly successful in designing a reform to realign regulatory incentives in the FDA.     

Wealth effects of food and drug administration (FDA) decisions

Government regulations are an increasingly important component of the environment in which firms operate. Regulations may subject firms to large costs and possibly regulatory-induced risks, both of which may have effects on stockholders' wealth. In this paper we investigate the valuation effects of Food and Drug Administration (FDA) product approvals, rejections and disciplinary decisions on the firms that operate in the food and drug industries. We find that FDA decisions have very large wealth effects. The large price changes associated with approval and rejection decisions suggest that a significant amount of uncertainty about FDA decisions is present almost up to the announcement day. These results are somewhat surprising given the lengthy period of time involved in developing and reviewing drugs and the continuous flow of information received by the market about their potential. We also find some evidence of information leaks preceding FDA announcements. With respect to disciplinary decisions, the evidence from the data suggests that stockholders experience large losses associated with FDA actions. Since these losses represent lost stream of future illegal income, it appears that ignoring FDA rules may be quite profitable for firms that are not caught.     

Franchisee Associations as Sources of Bargaining Power? Some Evidence

The empirical literature in economics and strategy on contract structure, including on franchise contract structure, has been largely based on agency and transaction cost theories. The effects of bargaining power have been much less studied. This paper considers the role of independent franchisee associations in franchising relationships as a means to test for the presence of bargaining power effects. We find that the presence or absence of a franchisee association is significantly related to each of three key contractual and relationship characteristics: contract duration, noncompete stringency, and terminations/nonrenewals. This suggests that bargaining power should be accounted for in studies of contract structure and relationship outcomes.     

Co-development ventures: Optimal time of entry and profit-sharing

We find the optimal time for entering a joint venture by two firms, and the optimal linear contract for sharing the profits. We consider risk-sharing, timing-incentive and asymmetric decisions contract designs. If the firms are risk-neutral and the cash payments are allowed, all three designs are equivalent. With risk aversion, the optimal contract parameters may vary significantly across the three designs and across varying levels of risk aversion. We also analyze a dataset of joint biomedical ventures, in which, in agreement with our theoretical predictions, both royalty and cash payments are mostly increasing in the smaller firm's experience, and the time of entry happens sooner for more experienced small firms.     

Optimal Licensing Contracts and the Value of a Patent

We extend Kamien and Tauman's (1986) analysis of the value of a patent. We find that an inventor can always design a fixed fee plus royalty contract such that his revenue is equal to the profit a monopoly endowed with the innovation could make on the market. This implies that the social value of a patent can be strictly negative whenever the patented innovation is of bad quality. We also explain why a principal can have an interest in using performance-based contracts although the principal and the agents are risk-neutral, information is symmetric, and agents' actions are verifiable.     

Employers' hiring practices,employment protection,and costly search: A vacancy-level analysis

An employer with a vacancy may respond to high search costs by lowering hiring requirements. While such an adjustment increases the employer's chances of filling the vacancy, it also more likely results in a match that terminates when the match is hit by match-specific productivity shocks. Drawing on a novel Slovenian vacancy dataset, we find that employers who are searching to fill temporary positions are more likely to hire underqualified workers when search costs are high. We find that search costs are taken into consideration when employers are searching to fill permanent positions in some specifications but not all. These findings suggest that for employers who are searching to fill a permanent position, the benefits of lowering hiring requirements when search costs are high are likely outweighed by: a) high firing costs if an under-qualified worker is hired on a permanent contract or b) the costs of undertaking a new search later if an under-qualified worker is hired on a temporary contract. These are novel findings about the employers' hiring practices in the presence of employment protection laws and costly search.     

Licensing and innovation with imperfect contract enforcement

Licensing promotes technology transfer and innovation, but enforcement of licensing contracts is often imperfect. We model contract enforcement as a game with perfect information but probabilistic enforcement and explore the implications of weak enforcement on the design of licensing contracts, the conduct of firms, and market performance. An upstream firm develops a technology that it can license to downstream firms using a fixed fee and a per‐unit royalty. Strictly positive per‐unit royalties maximize the licensor's profit if competition among licensees limits joint profits. With imperfect enforcement, the licensor lowers variable royalties to avoid cheating. Although imperfect contract enforcement reduces the profits of the licensor, weak enforcement lowers prices, increases downstream innovation, and in some circumstances can increase total economic welfare.     

Horizontal Integration Between Brand and Generic Firms in the Pharmaceutical Industry

This paper asserts that brand pharmaceutical firms (those mostly involved in the invention and production of new drugs) engage in a set of complementary activities that are different from those of generic pharmaceutical firms (those that primarily make off-patent medicines). Complementarities of the Milgrom-Roberts variety within, but not across, these two kinds of firms make it more efficient for pharmaceutical firms to specialize in either brand or generic production. Using FDA data, I show that this is indeed the case. I then examine the firms that produce both types of drugs to see if there are market-level strategic synergies between brand and generic products. I find generic entrants that belong to a corporation that owns the brand in the market are (1) not more likely to enter, (2) not more likely to be approved faster, and (3) not more likely to deter other generics from entering. Thus the advantage, or synergy, from mixing brand and generic activities in one corporation must arise elsewhere in the operations of the firm. If not, the integrated pharmaceutical firm is not the most efficient organizational form for the production of ethical drugs.     

Managing technology licensing for stochastic R&D: from the perspective of an enterprise information system

Enterprise information technology (IT) plays an important role in technology innovation management for high-tech enterprises. However, to date most studies on enterprise technology innovation have assumed that the research and development (R&D) outcome is certain. This assumption does not always hold in practice. Motivated by the current practice of some IT industries, we establish a three-stage duopoly game model, including the R&D stage, the licensing stage and the output stage, to investigate the influence of bargaining power and technology spillover on the optimal licensing policy for the innovating enterprise when the outcome of R&D is uncertain. Our results demonstrate that (1) if the licensor has low (high) bargaining power, fixed-fee (royalty) licensing is always superior to royalty (fixed-fee) licensing to the licensor regardless of technology spillover; (2) if the licensor has moderate bargaining power and technology spillover is low (high) as well, fixed-fee (royalty) licensing is superior to royalty (fixed-fee) licensing; (3) under two-part tariff licensing and the assumption of licensors with full bargaining power, if a negative prepaid fixed fee is not allowed, two-part tariff licensing is equivalent to royalty licensing which is the optimal licensing policy; if negative prepaid fixed fee is allowed, the optimal policy is two-part tariff licensing.     

Licensing a new product: Fee vs. royalty licensing with unionized labor market

In an economy with unionized labor market, we show that the payoff of an outside innovator may be higher under royalty licensing than under fixed-fee licensing and auction, if bargaining power of the labor union is sufficiently high. This result holds for both decentralized and centralized bargaining. It follows from our analysis that a combination of fixed-fee and output royalty can be preferable to the innovator compared to both royalty only licensing and auction (or fixed-fee licensing). We discuss the implications of positive opportunity costs of the licensees.     

Sovereign debt composition and time-varying public finance sustainability

We compute time-varying responses of the sovereign debt ratio to primary budget balances for 13 advanced economies between 1980 and 2012, and assess how fiscal sustainability reacts to different characteristics of government debt. We find that the sustainability time-varying coefficient increases and countries become more fiscally sustainable if they contract a higher share of long-term public debt, if more debt is held by the central bank or if it is easily marketable in capital markets.     

An analysis of UK franchise contracting 1989–1999

This paper examines UK franchise contracts over the period 1989–1999. Franchising is modelled as comprising three main variables, contract length, royalty rate and initial franchise fee. Up to now most authors have concentrated on the latter two variables, but with the data in this paper it is possible to assess the characteristics that impact on all three. Further, our analysis looks at what affects the probability of contract change. We take account of the limited dependent variable nature of the data and exploit sectoral heterogeneity. Our main findings are that the focus of attention on ‘aggregate’ variables is inappropriate and that contract length appears to be an important aspect of the franchise contract which is theoretically obvious, but until now has not been empirically tested. Copyright © 2003 John Wiley & Sons, Ltd.     

International Franchising Practices in Mexico: Do Franchisors Customize Their Contracts?

The contracting practices of franchisors outside their domestic market have received little attention in the empirical literature on franchising to date, largely because of lack of data. We exploit a novel data set that allows us to describe the contracts offered by a number of US and Canadian franchisors operating in Mexico and also compare them to contracts employed at home. Our analyses reveal a series of stylized facts that we hope will prove useful in guiding future empirical and theoretical research on contracting and especially on cross-border contracting practices. These are as follows: (1) The overwhelming majority of franchisors seeking franchisees in Mexico offer exactly the same contract to potential Mexican franchisees as that employed in the home market; (2) Among those franchisors that already have established outlets in Mexico, nearly half use the exact same fees in Mexico and at home; (3) The majority of those franchisors that make changes only alter the fixed fee component of the contract; (4) There is no evidence that franchisors use franchising more or less in Mexico compared to home as an alternative to royalty rate customization—in fact, the extent of franchising (versus company-owned units) of these firms in Mexico is not different systematically from that observed in their domestic market or worldwide; and (5) There is no evidence of increased customization over time—if anything, the evidence suggests increased similarities in contracting practices over time.     

Why Are Royalty Rates Higher in Service-type Franchises?

Royalty payments from a franchisee to a franchisor serve as incentive for the franchisor to provide appropriate levels of quality and brand, name investment. However, since they also distort the service provided by the franchisee, we should expect relatively lower royalty rates in franchises that are primarily service-oriented. Casual examination of royalty rates across product-oriented and service-oriented franchises shows that the opposite is true, with service-type franchises enjoying higher royalty rates. We resolve this apparent puzzle. The basic argument we put forth is that in product-type franchises, a franchisor can charge a wholesale price on goods transferred to the franchisee, thus using an alternative instrument that also serves as an incentive for the franchisor. Moreover, in general, a franchisor will use both wholesale price and royalty to minimize distortions in retail price and service at the retail level. We then test the predictions of our model on different industries and find confirmation for the same.     

药品冷链公路配送精细化组织方法研究

在对冷链药品物流结构分析的基础上,提出冷链药品运输精细化组织首先要明确冷链药品温度控制要求和冷链运输的流程,通过采用先进温度控制设备及合理控制运输时间,提高药品冷链运输效率。     

Optimal Precision of Accounting Information in Debt Financing

This paper studies qualitative characteristics of accounting systems that are used in debt financing. We consider a financially constrained firm that provides to lenders information on the value of assets that serve as collateral in a financing contract for a risky investment project. We find that the investor prefers an accounting system that provides biased signals about the value of assets. This bias adjusts the information content of the signals to maximize the probability of undertaking the project. Under fair value accounting, low book values are more precise measures of actual value than high book values, which is consistent with conditional conservatism. Next, we study accounting risk to study the effect of institutions that govern the financial reporting policy based on the optimal precision. We find that fair value measurement introduces greater accounting risk and is preferred by financially constrained firms to measurement at historical cost.     

A real options approach to valuing and negotiating licensing agreements

We apply real options modeling to a common pharmaceutical industry licensing arrangement to take into account various uncertainties and the flexibility value. The managerial flexibility is limited to the project abandonment option. We extend previous work by incorporating the phases required to bring the project from patent approval to market. We also incorporate a deterministic variable into the cash flow process that provides a realistic product lifecycle. We focus on the allocation of project value between licensor and licensee, i.e., the so-called “profit split” ratio (PSR) because it is commonly used in practice to negotiate terms. We find: (1) Ignoring the managerial flexibility in valuation may cause the licensee to either forego an acceptable deal or enter into an inferior deal. (2) The magnitude of project profitability as well as cost and sales uncertainty affects the licensor's bargaining power over compensation for granting abandonment flexibility to the licensee. (3) Managers must exercise care when estimating sales volatility because the flexibility value is more sensitive to sales volatility than it is to cost volatility. (4) Failure to incorporate the product lifecycle will produce suboptimal capital investment decisions.