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. Our dataset shows that in practice, many contracts are based on fifty/fifty profit sharing. In our model, that happens in the following cases: symmetric information and contracts which include fixed cash payments; asymmetric information, fixed cash payments included, and comparable bargaining power of the two firms; asymmetric information, fixed cash payments excluded, and one firm perceives extra benefits from entering the venture. The model predicts that the less experienced firms are compensated more by royalties and less by equity, which is confirmed empirically in the dataset. Overall, the optimal time of entry is quite robust to model specifications, and the loss of utility of the firm with less information is not very significant when it can dictate the parameters of the linear contract.