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American Economic Journal: Microeconomics: Vol. 3 No. 2 (May 2011)

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Exclusive Contracts, Innovation, and Welfare

Article Citation

Chen, Yongmin, and David E. M. Sappington. 2011. "Exclusive Contracts, Innovation, and Welfare." American Economic Journal: Microeconomics, 3(2): 194-220.

DOI: 10.1257/mic.3.2.194

Abstract

We extend Philippe Aghion and Patrick Bolton's (1987) classic model to analyze the equilibrium incidence and impact of exclusive contracts in a setting where research and development (R&D) drives industry performance. An exclusive contract between an incumbent supplier and a buyer arises when patent protection and/or the incumbent's R&D ability are sufficiently pronounced. The exclusive contract generally reduces the entrant's R&D, and can reduce the incumbent's R&D. Exclusive contracts reduce welfare if the incumbent's R&D ability is sufficiently limited, but can increase welfare if patent protection and the incumbent's R&D ability are sufficiently pronounced. (JEL D86, L14, O31)

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Authors

Chen, Yongmin (U CO)
Sappington, David E. M. (U FL)

JEL Classifications

D86: Economics of Contract: Theory
L14: Transactional Relationships; Contracts and Reputation; Networks
O31: Innovation and Invention: Processes and Incentives

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