Milestone payments in alliances: The moderating effect of equity ownership and network centrality

Abstract

Previous research has produced ambiguous and incomplete conclusions on how milestone payments influence alliance performance. By integrating the contractual governance framework with insights from behavioral economics on intrinsic motivation, this research investigates how the structure of cash payments between research and development partners impacts alliance performance. Analyzing a dataset of 140 pharmaceutical and biopharmaceutical New Molecular Entities approved by the FDA from 1993 to 2016, we first demonstrate that increased milestone payments reduce alliance performance. We then show that this adverse effect is attenuated when the complement supplier holds equity in the technology producer. Lastly, we provide evidence that the network centrality of the complement supplier offsets the negative impact of milestone payments on performance. These findings bridge the gap between behavioral and contractual views, underscoring the importance of incorporating both perspectives in studying alliance outcomes.