The Design of Vertical R&d Collaborations

Abstract: Suppliers play a major role in innovation processes. We analyze ownership allocations and the choice of R&D technology in vertical R&D cooperations. Given incomplete contracts on the R&D outcome, there is a trade-off between R&D specifically designed towards a manufacturer (increasing investment productivity) and a general technology (hold-up reduction). We find that the market solution yields the specific technology in too few cases. If the expertise of the supplier is important ex-post, combining manufacturer ownership with the specific technology becomes optimal. More intense product market competition shifts optimal ownership towards the supplier.