Outsourcing, Contracts and Innovation Networks
32 Pages Posted: 22 Jun 2006
Date Written: May 2006
Abstract
We study the decision of firms between vertical integration and outsourcing in a dynamic setting with product innovation. In so doing, we model an industry in which R&D is performed by independent research labs and outsourcing production requires complementary upstream and downstream inventions. In the presence of search friction and incomplete outsourcing contracts, we show that the ex-post bargaining power of upstream and downstream parties at the production stage feeds back to R&D incentives, thus affecting the emergence and the performance of labs specialized in complementary inventions.
Keywords: Innovation, incomplete contracts, outsourcing
JEL Classification: F12, F23
Suggested Citation: Suggested Citation
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