DP3516 Knowledge Creation and Control in Organizations

Author(s): Diego Puga, Daniel Trefler
Publication Date: August 2002
Keyword(s): appropriability, imperfect substitutability, incomplete contracts, incremental innovation
JEL(s): D23, L22, O31
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3516

The incremental innovations that underlie much of modern economic growth typically involve changes to one or more components of a complex product. This creates a tension. On the one hand, a principal would like an agent to contribute innovative components. On the other hand, ironing out incompatibilities between interdependent components can be a drain on the principal's energies. The principal can conserve her energies by tightly controlling the innovation process, but this may inadvertently stifle the agent's incentive to innovate. We show precisely how this tension between creating knowledge and controlling knowledge shapes organizational forms. The novel concepts introduced are illustrated with case studies of the flat panel cathode ray tube industry and Boeing's recent location decisions.