The Impact of Decision Rights on Innovation Sharing

Although innovation sharing between a buyer and a supplier—a common practice in the automotive industry—can increase the efficiency and total profit of a supply chain, suppliers are often reluctant to do so. Sharing innovations would leave the supplier in a vulnerable position if the buyer were to exploit the information (e.g., by resharing the supplier’s innovation with competing suppliers). Anecdotal evidence from automotive suppliers tells us that the nature of a supplier-buyer relationship for the most part depends on who (e.g., a short-run-focused procurement manager or a long-term-focused engineer) manages the relationship. In this paper, we examine how the allocation of decision rights to short-run- and long-run-focused employees affects collaboration between the firms. To accomplish this, we model a relationship between a supplier and a buyer where the buyer is a dual decision maker, consisting of long-run- and/or short-run-focused employees. We characterize the equilibrium of this model and show that the frequency of collaborative outcomes is lowest when the procurement manager has full control and highest when the engineer has full control or in a setup where employees can unilaterally enforce collaboration. A laboratory experiment confirms that collaborations occur more frequently when a manager with a long-term focus is in charge of or actively involved in decision making. Depending on how joint control is structured, joint control can help or hurt collaboration: Collaboration is highest when employees can unilaterally enforce it, whereas the random joint-control case results in collaboration that is as low as in the procurement manager control case.