Research is a productive activity where the primary outputs are innovations or intellectual property and the major inputs (in most cases) are services of human or intellectual capital. Innovations are primary sources of economic growth (Romer 1990, 1994; Huffman and Evenson 1993; Griliches 1990, 1994) and have large social rates of return (Huffman and Evenson 1993; Adams 1990). Research as a production activity involves output uncertainty. For research in general and pretechnology sciences, the uncertainty is so great that no exact output can be defined. Ex ante output is not contractible. For research in applied sciences, the uncertainty is less because specific innovations can be identified. For example, a specific drug, machine, or chemical is contractible. However, the quality or specific attributes of the innovation are uncertain.
Huffman, Wallace E. and Just, Richard E., "Transaction Costs, Fads, and Politically Motivated Misdirection in Agricultural Research" (1995). Economic Staff Paper Series. 290.