The Double-Edged Effect of Knowledge Acquisition: How Contracts Safeguard Pre-Existing Resources

Abstract

Acquiring knowledge on a partner’s pre-existing resources plays an important yet ambiguous role in collaborative relationships. We formally model how contracts trade off productive and destructive uses of knowledge in a buyer-supplier relationship. We show that, when the buyer’s pre-existing resources are vulnerable to the revelation of sensitive knowledge, the supplier overinvests in knowledge acquisition as it expects to use the knowledge as a threat in price negotiations. A non-renegotiable closed-price contract prevents such overinvestment and reduces the supplier’s ability to expropriate the buyer ex post. Our results extend to the cases of renegotiable closed-price contracts, repeat interactions between a buyer and a supplier, and the use of non-disclosure policies. We draw theoretical, empirical, and managerial implications from our model.

Keywords: Knowledge investment, knowledge acquisition, contract, price format, firm resources, firm capabilities, negotiation

JEL Classification: D23; L14; L22; M21; M31