Essays on Vertical Integration, Vertical R&D Spillovers, Research Joint Ventures, and Information Sharing

Abstract

The first essay, entitled “Production technology, information technology, and vertical integration under asymmetric information”, addresses the effect of technological progress on the frontiers of the firm, building on transaction cost theory and agency theory. The model incorporates four types of costs: production, coordination, management, and transaction costs. The market has lower production costs, but higher coordination costs, than the firm. A principal-two agents framework with adverse selection and moral hazard is adopted. It is found that technological progress on production and coordination costs tend to have diametrically opposite effects on procurement. In general, technological progress on production costs leads to more vertical integration, whereas technological progress on coordination costs leads to more subcontracting. However the opposite result obtains in many cases. When technological change concerns the level of costs, its effect on procurement depends on the cost differential between the firm and the market, and on the relative importance of production and coordination costs; whereas, when technological change affects the effect or disutility of effort, its impact on procurement is unambiguous. Technical change can reduce the importance of some types of costs in the firm’s procurement decision. The static effects of competition and monitoring on the frontiers of the firm, and their dynamic effects regarding how they affect the relationship between technical change and the firm's frontiers, are shown to differ. The paper constitutes a bridge between contractual explanations and technological explanations of the existence and frontiers of the firm.The purpose of the second essay, entitled “Vertical RD the model shows that this result does not necessarily hold when vertical spillovers and vertical cooperation are taken into account. The paper proposes a theory of innovation and market structure, showing that the relation between innovation and competition depends on horizontal spillovers, vertical spillovers, and cooperative settings. The private incentives for R&D cooperation are addressed. It is found that buyers and sellers have divergent interests regarding the choice of cooperative settings, that spillovers increase the likelihood of the emergence of cooperation in a decentralized equilibrium, and that coordination problems on the adoption of profitable cooperative settings can arise.The third essay, entitled “Information sharing and the stability of cooperation in Research Joint Ventures”, studies information sharing and the stability of cooperation in cost reducing Research Joint Ventures (RJVs). In a four-stage game-theoretic framework, firms decide on participation in a RJV, information sharing, R&D expenditures, and output. An important feature of the model is that voluntary information sharing between cooperating firms increases information leakage from the RJV to outsiders. It is found that it is the spillover from the RJV to outsiders which determines the decision of insiders whether to share information, while it is the spillover affecting all firms which determines the level of information sharing within the RJV. RJVs representing a larger portion of firms in the industry are more likely to share information. It is also found that when sharing information is costless, firms never choose intermediate levels of information sharing: they share all the information or none at all. The size of the RJV is found to depend on three effects: a coordination effect, an information sharing effect, and a competition effect. Depending on the relative magnitudes of these effects, the size of the RJV may increase or decrease with spillovers. The effect of information sharing on the profitability of firms as well as on welfare is studied.