Collaborative innovation: weak commitments and unenforceable contracts

Abstract

Innovation that crosses organisational boundaries, such as those between buyers and sellers, requires complementary investments of assets by participants. This creates a contracting problem with the possibility of opportunistic behaviour. We show that this problem can be overcome using the mechanism of weak commitments. In situations where both parties can see a return on their investment in innovation that increases with their partner's investments, there is a bounded range of commitment that can be made unilaterally by either party within which cooperative behaviour becomes the dominant strategy for both parties. This finding is important because it shows that collaborative innovation is possible without the need for elaborate contracts or reliance on intangible constructs such as relational trust or reputational cost. This suggests that collaboration is possible in situations where it was previously considered unlikely and suggests new approaches to research on inter-firm collaborations.