Working Paper: CEPR ID: DP3516
Authors: Diego Puga; Daniel Trefler
Abstract: 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.
Keywords: Appropriability; Imperfect Substitutability; Incomplete Contracts; Incremental Innovation
JEL Codes: D23; L22; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tension between creating and controlling knowledge (O36) | organizational forms (L22) |
| principal retains control over knowledge creation (O36) | agent has less incentive to innovate (O31) |
| agent has less incentive to innovate (O31) | lower overall creative efforts (D29) |
| control delegated to agent (L85) | agent's incentive to innovate increases (O31) |
| agent's incentive to innovate increases (O31) | shift implementation costs onto principal (G19) |
| appropriability risks are high (P14) | principals less likely to engage agents in knowledge creation (O36) |
| degree of substitutability (L15) | effectiveness of control as an incentive device (E61) |
| higher substitutability (D11) | greater incentive for agent to innovate (O31) |