American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
The Organization of Innovation: Incomplete Contracts and the Outsourcing Decision
American Economic Journal: Microeconomics
(pp. 56–109)
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.Citation
Jungbauer, Thomas, Sean Nicholson, June Pan, Michael Waldman, and Lucy Xiaolu Wang. 2026. "The Organization of Innovation: Incomplete Contracts and the Outsourcing Decision." American Economic Journal: Microeconomics 18 (2): 56–109. DOI: 10.1257/mic.20240053Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- D22 Firm Behavior: Empirical Analysis
- L22 Firm Organization and Market Structure
- L24 Contracting Out; Joint Ventures; Technology Licensing
- L65 Chemicals; Plastics; Rubber; Drugs; Biotechnology
- O31 Innovation and Invention: Processes and Incentives
- O34 Intellectual Property and Intellectual Capital