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Property Rights, Firm Boundaries, and R&D Inputs
journal contribution
posted on 2000-01-01, 00:00 authored by Ashish Arora, Robert MergesThis paper provides an explanation of the role of intellectual property rights (IPRs) in
information-intensive vertical supply relationships. Specifically, we explore the
connection between stronger property rights and the enhanced viability of specialized
(versus vertically integrated) input suppliers under incomplete contracts and information
spillovers. Information spillovers arise due to the supplier’s effort to customize its
generalized technology to the specific needs of the buyer. We start by modeling a
tradeoff between incentives and two types of information spillovers: "synergies," in
which joint efforts reveal new applications of existing technology; and "leakage," or
disclosure of existing information. Whereas incentives for customization are higher under
specialization, integration internalizes spillovers and prevents rent dissipation. IPRs favor
specialization by reducing buyer opportunism, and ceteris paribus, leakage favors
integration relative to synergies. We extend our basic results to analysis of buyouts and
spinoffs, and assay an extensive body of empirical evidence that provides broad support
for our approach.