The Organization of Innovation: Incomplete Contracts and the Outsourcing Decision
American Economic Journal: Microeconomics · 2026 · Thomas Jungbauer、Sean Nicholson、June Pan、Michael Waldman、Lucy Xiaolu Wang
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.