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Abstract
It is commonplace for firms to collaborate with others to gain access to technological components for
innovation. This paper examines the choice of organizational form for such activities: when should a firm
hire a technological expert as a temporary employee, transact through consulting spot markets, or
engage in a long-term employment or supply relationship with the expert? Property rights theory is
applied to examine the incentives and commitment created by different organization forms when the
property rights of knowledge assets are incomplete. The model highlights the role of fallback options in
sustaining socially efficient implicit contracts. Comparison of long-term employment and supply
relationships shows that, contrary to received wisdom, an employment relationship is a less robust
arrangement than a supply relationship in the presence of large knowledge spillovers. Nevertheless, the
employment relationship is relatively more sustainable when there are complementarities between the
parties’ cooperation investments. Empirical implications for structuring R&D and consulting
arrangements are discussed.