Effort Exertion And Contract Design In Cooperative R&D With Fairness Concerns

Fairness is one of the non-stop concerns of human society.The principle of fairness has been considered to have a decisive influence in social decision-making.There is abundant evidence to show that both firms and individuals are concerned about fairness.Meanwhile,company competition has become more complex and fiercer than ever.Product development has become a means for companies of all sizes to rely on to improve competitiveness.However,it is difficult for most companies to rely solely on in-house R&D.As a result,many companies seek external R&D as a source of innovation,namely cooperative R&D.This paper introduces the fairness preference into cooperative R&D and constructs a cooperative R&D model composed of two participants,focusing on the issue of contract design and innovation efforts exertion of a focal firm(FF)and an external partner(EP).At the same time,the portrayal of the fairness reference in the traditional fairness concerns model cannot reflect the characteristics under cooperative R&D background.The characteristic means that the contribution of each participant is affected by the cooperative R&D decision-making.This characterization is also conducive to studying the role and influence mechanism of fairness concern behaviors in the cooperative R&D process.Under a sequential game structure,participants decide on the ratio of revenue distribution of cooperative R&D and innovation efforts.Based on the model solution analysis,we analyze and explain the impact of fairness preference on the results of cooperative R&D and provide the necessary management insight for enterprises when making product cooperative R&D decisions.From the theoretical perspective,this research extends the literature in at least two ways.First,a sequential game model is developed to explore how FF and EP cooperate in a new product development process,with fairness concerns considered.Second,a new concept of fairness is proposed,which calls "effort-related fairness".In economic activity,fairness often arises from the profit comparison among participants.In the previous literature,for evaluating fairness in the profit among parties,an exogenous parameter is often used to represent the equitable distribution ratio and to serve as the basis for decision-makers’assessment of equitable reference.However,the exogeneity of the parameter means that each participant’s perception of fairness is implicit and unilateral.This formulation of fairness is not appropriate for CPD because efforts exerted by both participants affect the equitable distribution ratio.For this reason,we propose the concept of "effort-related fairness".In our model based on the concept,the decision-makers’ equitable distribution ratio is endogenous and consists of all the parties’ efforts.Thus,the new concept is explicit and bilateral and can be extended to a multilateral setting.We find that for EP,her fraction of total revenue in the fairness-concerned model may be lower than that in the benchmark without fairness concerns.The research results also show that if EP is extremely inequity averse,FF is more willing to develop products by himself.Through the analytical comparison between fairness-concerned model and benchmark,it verifies that EP’s fairness concern has negative impacts on the utility of FF and the product value.From the practical perspective,some management implications are gained for FF’s R&D cooperation decisions when EP considers fairness during cooperative R&D.When the revenue fraction of EP cannot be changed,neither FF nor EP earns a higher profit.Therefore,FF has the motivation to change the revenue-sharing contract for improving his own profit.When the revenue fraction is determined by FF,the conditions and consequences of cooperative R&D are changed by EP’s fairness concern in three ways.First,FF tends to collaborate with EF to develop the product if and only if EP is not sufficiently inequity averse and believes that her contribution is not sufficiently high.Second,if the optimal decision of FF is to collaborate with EP,FF might choose a lower fraction of total revenue for EP than that of the benchmark.The main reason is that EP’s inequity aversion may prompt FF to rely more on himself.Third,FF should realize that EP’s fairness concern does not show a positive effect on his optimal profit,and the product value is monotonically non-increasing in EP’s fairness concern.In addition,even if considering follow-up sales,FF’s decision about whether to collaborate with EP would not change.