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R&D Outsourcing Contract with Information Leakage

  • Shirley J. , HO

    (National Chengchi University, Taiwan)

This paper studies an R&D outsourcing contract between a firm and a contractor, considereing the possibility that in the interim stage, the contractor might sell the innovation to the rival firm. Our result points out that due to the competition in the interim stage, the reward needed to prevent leakage will be pushed up to the extent that a profitable leakage free contract does not exist. This result will also apply to cases considering revenue-sharing schemes and a disclosure punishment for commercial theft. Then, we demonstrate that in a competitive mechanism where the R&D firm hires two contractors together with a relative performance scheme, the disclosure punishment might help and there exists a perfect Bayesian Nash equilibrium where the probability of information leakage is lower and the equilibrium reward is also cheaper than hiring one contractor.

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File URL: http://sites.uclouvain.be/econ/DP/IRES/2007-26.pdf
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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2007026.

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Length: 31
Date of creation: 01 Sep 2007
Date of revision:
Handle: RePEc:ctl:louvec:2007026
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  1. Edwin Lai & Raymond Riezman & Ping Wang, 2009. "Outsourcing of innovation," Economic Theory, Springer, vol. 38(3), pages 485-515, March.
  2. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  3. Fahad Khalil & Jacques Lawarree, 2006. "Incentives for corruptible auditors in the absence of commitment," Working Papers UWEC-2005-09-P, University of Washington, Department of Economics.
  4. Helmut Bester & Roland Strausz, . "Contracting with Imperfect Commitment and Noisy Communication," Papers 017, Departmental Working Papers.
  5. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  6. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-56, May.
  7. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Jaffe, Adam B, 1986. "Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value," American Economic Review, American Economic Association, vol. 76(5), pages 984-1001, December.
  9. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  10. Qiu, Larry D., 2006. "A general equilibrium analysis of software development: Implications of copyright protection and contract enforcement," European Economic Review, Elsevier, vol. 50(7), pages 1661-1682, October.
  11. Dinopoulos, Elias & Segerstrom, Paul, 2006. "North-South Trade and Economic Growth," CEPR Discussion Papers 5887, C.E.P.R. Discussion Papers.
  12. Kofman, F. & Lawarree, J., 1993. "On the Optimality of Allowing Collusion," Working Papers 93-02, University of Washington, Department of Economics.
  13. Tirole, Jean, 1986. "Hierarchies and Bureaucracies: On the Role of Collusion in Organizations," Journal of Law, Economics and Organization, Oxford University Press, vol. 2(2), pages 181-214, Fall.
  14. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
  15. Gromb, Denis & Martimort, David, 2007. "Collusion and the organization of delegated expertise," Journal of Economic Theory, Elsevier, vol. 137(1), pages 271-299, November.
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