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An incomplete contract analysis of innovation management: “Open vs. closed” innovation in a dynamic framework

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  • Suzuki, Yutaka

Abstract

Introducing the dynamic accumulation of “capability assets”, we extend the base model of Aghion = Tirole (1994), which applied the property rights approach of Grossman=Hart=Moore (1986,1990) to innovation management, into the two-period version, and analyze how “changes in firm boundaries” affect innovation and how “firm boundaries” regarding innovation are determined from a long-term perspective. In our two-period model (with organizational capability asset), it is optimal to allocate property rights to those with higher marginal efficiency of investment including dynamic effects (direct effects and strategic effects). If the dynamic marginal efficiency of investment of the research firm is sufficiently large, Non-integration (R-Ownership) regime will be chosen and “Open Innovation” will emerge. If the dynamic marginal efficiency of investment of the production firm is sufficiently large, Integration (P-Ownership) regime will be chosen and “Closed Innovation” by large firms will emerge. If the dynamic marginal efficiency of investment of the production firm is not so high, even when it is optimal to “integrate” in a static game, it can be optimal in a dynamic framework to remain “non-integrated” and keep the partnership relationship between independent firms to induce investment incentives from both sides. An extension to longer-periods and the discussion on Cash Constraints are also presented.

Suggested Citation

  • Suzuki, Yutaka, 2025. "An incomplete contract analysis of innovation management: “Open vs. closed” innovation in a dynamic framework," Research in Economics, Elsevier, vol. 79(4).
    • Handle: RePEc:eee:reecon:v:79:y:2025:i:4:s1090944325000560
    DOI: 10.1016/j.rie.2025.101080
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    References listed on IDEAS

    as
    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    2. Oliver Hart & Bengt Holmstrom, 2010. "A Theory of Firm Scope," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(2), pages 483-513.
    3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    4. Donald B. Hausch & Yeon-Koo Che, 1999. "Cooperative Investments and the Value of Contracting," American Economic Review, American Economic Association, vol. 89(1), pages 125-147, March.
    5. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    6. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
    7. Aghion, Philippe & Tirole, Jean, 1994. "Opening the black box of innovation," European Economic Review, Elsevier, vol. 38(3-4), pages 701-710, April.
    8. Philippe Aghion & Jean Tirole, 1994. "The Management of Innovation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1185-1209.
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    11. Yutaka Suzuki, 2006. "Equilibrium incentives and accumulation of relational skills in a dynamic model of hold up," Economics Bulletin, AccessEcon, vol. 12(7), pages 1-11.
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    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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