Journal article
Outsourcing of innovation
Economic theory, Vol.38(3), pp.485-515
03/2009
DOI: 10.1007/s00199-007-0326-4
Abstract
This paper looks at the outsourcing of research and development (R&D) activities. We consider cost reducing R&D and allow manufacturing firms to decide whether to outsource the project to research subcontractors or carry out the research in-house. We use a principal-agent framework and consider fixed and revenue-sharing contracts. We solve for the optimal contract under these constraints. We find that allowing for revenue-sharing contracts increases the chance of outsourcing and improves economic efficiency. However, the principal may still find it optimal to choose a contract that allows the leakage to occur—a second-best outcome when leakage cannot be monitored or verified. Stronger protection of trade secrets can induce more R&D outsourcing without inhibiting technology diffusion and increase economic efficiency, as long as it does not significantly lengthen the product cycle.
Details
- Title: Subtitle
- Outsourcing of innovation
- Creators
- Edwin L.C. Lai - Federal Reserve Bank of DallasRaymond Riezman - University of IowaPing Wang - Washington University in St. Louis
- Resource Type
- Journal article
- Publication Details
- Economic theory, Vol.38(3), pp.485-515
- DOI
- 10.1007/s00199-007-0326-4
- ISSN
- 0938-2259
- eISSN
- 1432-0479
- Number of pages
- 31
- Language
- English
- Date published
- 03/2009
- Academic Unit
- Economics
- Record Identifier
- 9984963100202771
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