Abstract
Modularity is a means of partitioning technical knowledge about a product or process. When state-sanctioned intellectual property (IP) rights are ineffective or costly to enforce, modularity can be used to hide information and thus protect IP. We investigate the impact of modularity on IP protection by formally modeling the threat of expropriation by agents. The principal has three options to address this threat: trust, licensing, and paying agents to stay loyal. We show how the principal can influence the value of these options by modularizing the system and by hiring clans of agents, thus exploiting relationships among them. Extensions address screening and signaling in hiring, the effects of an imperfect legal system, and social norms of fairness. We illustrate our arguments with examples from practice.
Highlights
Modularity brings many technical and organizational benefits, including the division of labor, reduced cognitive complexity, and higher adaptability and evolvability (Baldwin and Clark, 2000; Garud and Kumaraswamy, 1995; Schilling, 2000; Simon, 1962)
We critically evaluate the predictions of rational choice theory when applied to agents who are socialized within relationships
Following common practice in economics, we model a relational contract between a principal and his agents as a repeated game in which the principal essentially pays the agents not to defect (Baker et al, 2002; Bull, 1987)
Summary
Modularity brings many technical and organizational benefits, including the division of labor, reduced cognitive complexity, and higher adaptability and evolvability (Baldwin and Clark, 2000; Garud and Kumaraswamy, 1995; Schilling, 2000; Simon, 1962). The presence of trustworthy agents in the population makes the option of “doing nothing”—i.e., banking on the possibility that there is no untrustworthy agent among the employees—relevant for the principal, in addition to ex ante licensing and setting up relational contracts. Assuming that all members of a clan act together, the presence of clans in effect reduces the number of independently acting agents among the employees This makes both doing nothing and a relational contract more attractive relative to licensing. Each module has fewer agents than the whole system and is worth less; doing nothing and relational contracts increase in value relative to licensing This effect increases as modules exhibit higher levels of complementarity. We conclude the paper by describing the limitations of our analysis, implications for scholars and managers, and directions for future work
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