Discussion paper

DP5681 Outsourcing, Contracts and Innovation Networks

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.

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Citation

Ottaviano, G and A Naghavi (2006), ‘DP5681 Outsourcing, Contracts and Innovation Networks‘, CEPR Discussion Paper No. 5681. CEPR Press, Paris & London. https://cepr.org/publications/dp5681