MANAGING R&D IN VERTICAL RELATIONSHIPS

We study the optimal strategy for research and development (R&D) in a buyer‐supplier relationship. The buyer chooses whether to (1) insource a cost‐reducing R&D to its own research‐subunit or to (2) outsource it to its manufacturing supplier. The buyer cannot observe the R&D effort in either case, but can better observe the R&D result when the R&D is conducted internally. According to our analysis, the buyer prefers...