Modulate research effort in inbound alliance

Research output: Contribution to conferenceOther

Abstract

We address the R&D supply chain where a customer wants to sign an R&D contract with a supplier in aninbound open innovation style. Supplier has to decide how much effort put on contract: effort is assumed as nonobservablethen it cannot be constrained contractually. We model the R&D process like a staged one, whichallows for both an early contract and a late one. The overall committed effort depends on the alliance timing:earlier contracts will ask for a greater cumulated effort although they offer risk-sharing opportunity. On the otherhand, later contracts see supplier with a stronger ex-ante bargaining power position, due to shorter (and then lessrisky) contract length and experience acquired in the previous period in her own. The third element (after timingand supplier effort) of the contract we account for is the royalty amount that can be prefigured only by thesupplier being her effort unobservable. We model the problem assuming that when both partners exert themaximum affordable effort they are able to achieve the maximum innovation value (in this way we separatedirect and indirect risk, and we assume no relational risk); moreover we assume a research production functionconvex for low effort and concave for high effort. These hypotheses make the optimal time to agree dependingon the convexity of the production function: in case of convexity (low effort) it is more convenient for thesupplier a late contract agreement for which the best response is an effort lower than in case of early contract andthis means a lower innovation value. The opposite holds for high effort.
Original languageEnglish
Pages329-336
Number of pages8
Publication statusPublished - 2014

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Alliances
Suppliers
Convexity
Value innovation
Open innovation
Production function
Best response
Relational risk
Risk sharing
Supply chain
Bargaining power
Royalty

Cite this

Modulate research effort in inbound alliance. / Abbate, Lorenzo; Lo Nigro, Giovanna.

2014. 329-336.

Research output: Contribution to conferenceOther

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AB - We address the R&D supply chain where a customer wants to sign an R&D contract with a supplier in aninbound open innovation style. Supplier has to decide how much effort put on contract: effort is assumed as nonobservablethen it cannot be constrained contractually. We model the R&D process like a staged one, whichallows for both an early contract and a late one. The overall committed effort depends on the alliance timing:earlier contracts will ask for a greater cumulated effort although they offer risk-sharing opportunity. On the otherhand, later contracts see supplier with a stronger ex-ante bargaining power position, due to shorter (and then lessrisky) contract length and experience acquired in the previous period in her own. The third element (after timingand supplier effort) of the contract we account for is the royalty amount that can be prefigured only by thesupplier being her effort unobservable. We model the problem assuming that when both partners exert themaximum affordable effort they are able to achieve the maximum innovation value (in this way we separatedirect and indirect risk, and we assume no relational risk); moreover we assume a research production functionconvex for low effort and concave for high effort. These hypotheses make the optimal time to agree dependingon the convexity of the production function: in case of convexity (low effort) it is more convenient for thesupplier a late contract agreement for which the best response is an effort lower than in case of early contract andthis means a lower innovation value. The opposite holds for high effort.

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