(Solution) - The development of a drug requires Food and Drug Administration -(2025 Original AI-Free Solution)

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The development of a drug requires Food and Drug Administration (FDA) approval at five stages (a preclinical phase; clinical phases I, II, and III; and a final approval). A pharmaceutical company could commit a lump-sum amount upfront to acquire a prospective compound from another firm and then follow it through these stages. Or it could enter into a staged contract where in the acquirer pays an amount at each of the approvals. Assume that, in present-value terms, the lump-sum payment is equivalent to the expected total of the staged payments. What is the advantage to the acquirer of the contract for staged commitment?