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Collaboration, Innovation, and Contract Design

Matthew Jennejohn

Brigham Young University - J. Reuben Clark Law School

Columbia Law and Economics Working Paper No. 319

The rise of the network as a form of economic organization renders problematic our standard understanding of how capitalism is governed. As the governance of production shifts from vertical integration to horizontal contract, a puzzle arises: how do contracts, presumed to be susceptible to hold-up problems due to incompleteness, control production arrangements that by their nature invite opportunism? Relying on publicly-available contracts taken from a number of industries, I argue that firms govern their collaborations through a number of new contract mechanisms, the summation of which is a novel governance system. Because traditional theories of contractual control struggle to fully explain this new behavior, I re-conceptualize contracting as an effort, inter alia, to establish a pragmatic learning process between collaborators. Such a learning process must be formally instituted among parties because of the unique, endogenous, and pervasive uncertainty that characterizes bilateral experimentation. Thus, to standard accounts of incomplete contracting, this article provides an alternative (but complementary) explanation of how contract governs inter-firm networks, not by downplaying the importance of hold-ups or by inflating the role of relational norms but by explicating a new positive theory of contract design.

Number of Pages in PDF File: 69

Keywords: incomplete contracts, research, development, theory of the firm, deverticalization, generative

JEL Classification: D81, D83, K12, L14, L22, L23, O12, O31, O32, D23

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Date posted: September 17, 2007  

Suggested Citation

Jennejohn, Matthew, Collaboration, Innovation, and Contract Design. Columbia Law and Economics Working Paper No. 319. Available at SSRN: http://ssrn.com/abstract=1014420 or http://dx.doi.org/10.2139/ssrn.1014420

Contact Information

Matthew Jennejohn (Contact Author)
Brigham Young University - J. Reuben Clark Law School ( email )
430 JRCB
Brigham Young University
Provo, UT 84602
United States

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