Organizational Choice. Unit members have the absolute right to form, join, or participate in the organization(s) of their choice.
Organizational Choice. The timing of events is as follows. First, the firm chooses the organizational form β ∈ {βV , βO} and the amount of transmitted knowledge δ ∈ [0, 1]. Second, the firm posts a contract for the provision of the customized input, stating the chosen organizational form and knowledge transmission. Both are verifiable by third parties and thus contractible. Third, a large number of identical potential suppliers competitively bid for the contract and the firm selects one among them. Fourth, the selected supplier decides how much to invest in the relationship with the firm, that is, how much to supply of the intermediate input x. Fifth, the firm and the supplier bargain on how to share their joint surplus consisting of revenues from final sales. Sixth and last, final production takes place, output is sold and revenues are shared according to the agreed split rule. Given this timing, the model has to be solved backwards, characterizing first the supplier’s decision on x and then the firm’s decisions of β and δ. As for the former, taking β ∈ {βV , βO} and δ ∈ [0, 1] as given, the supplier chooses x so as to maximize its profit πS = (1 − β) r(x) − c x, (4) where c is the marginal cost of input production, r(x) = θρA1−ρ(δx)ρ is revenues from final sales, and (1 − β) is the supplier’s share of these revenues. The profit-maximizing amount of input supplied 2For example, in the case of protection through patenting, κ(ω, λ) would compound the difficulty of filing and getting a patent approved with the cost of enforcing the patent.
