Working Paper: CEPR ID: DP5681
Authors: Alireza Naghavi; Gianmarco I.P. Ottaviano
Abstract: 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.
Keywords: Incomplete Contracts; Innovation; Outsourcing
JEL Codes: F12; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ex-post bargaining power of upstream and downstream parties (L14) | R&D incentives (O31) |
| stronger bargaining power (L14) | reduced R&D incentives (O39) |
| weak bargaining power of suppliers (L14) | discourages investment in innovation (O31) |
| strong bargaining power of suppliers (L14) | inefficiencies in matching process for specialized suppliers (C78) |
| optimal supplier bargaining power (L14) | maximizes product development (O36) |