Thursday, March 5, 2009
Posted by D. Daniel Sokol
ABSTRACT: We extend Aghion and Bolton (1987)s 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 inno- vation protection and/or the incumbents R&D ability are su¢ ciently pronounced. The exclusive contract generally reduces the entrants R&D, and sometimes also reduces the incumbents R&D. Exclusive contracts reduce welfare if patent protection for innovation or the incumbents R&D ability is su¢ ciently limited. Exclusive contracts increase welfare if patent protection and the incumbents R&D ability are both su¢ ciently pronounced.