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The Organization of Innovation: Incomplete Contracts and the Outsourcing Decision

Author

Listed:
  • Thomas Jungbauer
  • Sean Nicholson
  • June Pan
  • Michael Waldman
  • Lucy Xiaolu Wang

Abstract

Why do firms outsource research and development (R&D) for some products while conducting R&D in-house for similar ones? An innovating firm risks cannibalizing its existing products. The more profitable these products, the more the firm wants to limit cannibalization. We apply this logic to the organization of R&D by introducing a novel theoretical model in which developing in-house provides the firm more control over the new product's location in product space. An empirical analysis of our testable predictions using pharmaceutical data concerning patents, patent expiration, and outsourcing at various stages of the R&D process supports our theoretical approach.

Suggested Citation

  • Thomas Jungbauer & Sean Nicholson & June Pan & Michael Waldman & Lucy Xiaolu Wang, 2026. "The Organization of Innovation: Incomplete Contracts and the Outsourcing Decision," American Economic Journal: Microeconomics, American Economic Association, vol. 18(2), pages 56-109, May.
    • Handle: RePEc:aea:aejmic:v:18:y:2026:i:2:p:56-109
    DOI: 10.1257/mic.20240053
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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