Technological Innovation Specificity Investment and Governance Mechanism

This paper provides a framework for addressing the question of the underinvestment of technological innovation. Following Hart and Moore, we propose a contract model to show the mechanism of the underinvestment of technological innovation according to analytical framework of assets specificity theory. Further analyses show that the underinvestment of technological innovation is due to the high degree of transaction costs. We would choose the proper governance mechanism to operate technological innovation varies with the degree of asset specificity.