Incentivizing Knowledge Transfers

Abstract

We study the optimal design of relational contracts that incentivize an expert to share specialized knowledge with a novice. While the expert fears that a more knowledgeable novice may later erode his future rents, a third-party principal is willing to allocate her resources to facilitate knowledge transfer. In the unique profit-maximizing contract between the principal and the expert, the expert is asked to train the novice as much as possible, for free, in the initial period; knowledge transfers then proceed gradually and perpetually, while the principal offers lump-sum compensations to the expert right after verifying each transfer; even in the long run, a complete knowledge transfer might not be attainable. Our analysis sheds light on the success of several prominent cross-border technology transfers that took place in China's auto industry and Korea's high-speed rail development.