Property Rights, Firm Boundaries, and R&D Inputs

42 Pages Posted: 11 Jan 2001

See all articles by Ashish Arora

Ashish Arora

Duke University - Fuqua School of Business; National Bureau of Economics Research; Duke Innovation & Entrepreneurship Initiative

Robert P. Merges

University of California, Berkeley - School of Law

Abstract

This Article offers an explanation of the role of intellectual property rights (IPRs) in information-intensive vertical supply relationships. In particular, we explore the connection between stronger property rights and the enhanced viability of independent (versus vertically integrated) input supply firms when contracts are incomplete. We start by modeling a tradeoff between two types of information transfer in buyer-supplier relationships: "synergies," in which joint efforts reveal new applications of existing technology; and "leakage," or disclosure of existing information. We show that property rights in the hands of an independent input supplier can create the potential for greater inter-firm synergy, outweighing the risk of leakage. Greater synergies arise due to the supplier's greater effort to adapt its generalized technology to the specific needs of the buyer. Property rights play a crucial role: they reduce the risk of buyer firm opportunism, in effect raising the cost of the buyer's "outside option" in the event the supplier-buyer contract is terminated. The "residual" nature of property rights as described for example by Hart (1995) makes them more effective in this regard than contracts alone. We extend our basic results to analysis of buyouts and spinoffs, and assay an extensive body of empirical evidence. Broad support is found for our approach, pointing the way to future exploration of the relationship between property rights specifications and the opening up of new contracting horizons.

JEL Classification: K11, K19, L22

Suggested Citation

Arora, Ashish and Merges, Robert P., Property Rights, Firm Boundaries, and R&D Inputs. Available at SSRN: https://ssrn.com/abstract=255869 or http://dx.doi.org/10.2139/ssrn.255869

Ashish Arora

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

National Bureau of Economics Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Robert P. Merges (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States
510-643-6199 (Phone)
510-643-6171 (Fax)

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