DP5681 Outsourcing, Contracts and Innovation Networks
|Author(s):||Alireza Naghavi, Gianmarco Ottaviano|
|Publication Date:||May 2006|
|Keyword(s):||incomplete contracts, innovation, outsourcing|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5681|
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.