Jason C. Hsu
NBER Working Papers and Publications
|October 2003||A Model of R&D Valuation and the Design of Research Incentives|
with Eduardo S. Schwartz: w10041
We develop a real options model of R&D valuation, which takes into account the uncertainty in the quality of the research output, the time and cost to completion, and the market demand for the R&D output. The model is then applied to study the problem of pharmaceutical under-investment in R&D for vaccines to treat diseases affecting the developing regions of the world. To address this issue, world organizations and private foundations are willing to sponsor vaccine R&D, but there is no consensus on how to administer the sponsorship effectively. Different research incentive contracts are examined using our valuation model. Their effectiveness is measured in the following four dimensions: cost to the sponsor, the probability of development success, the consumer surplus generated and the expe...
Published: Hsu, Jason C. and Eduardo S. Schwartz. "A Model of R&D Valuation and the Design of Research Incentives." Insurance: Mathematics and Economics 43, 3 (December 2008): 350-67.