Relational Knowledge Transfers

An expert must train a novice. The novice initially has no cash, so he can only pay the expert with the accumulated surplus from his production. At any time, the novice can leave the relationship with his acquired knowledge and produce on his own. The sole reason he does not is the prospect of learning in future periods. The profit-maximizing relationship is structured as an apprenticeship, in which all production generated during training is used to compensate the expert. Knowledge transfer takes a simple form. In the first period, the expert gifts the novice a positive level of knowledge, which is independent of the players’ discount rate. After that, the novice’s total value of knowledge grows at the players’ discount rate until all knowledge has been transferred. The inefficiencies that arise from this contract are caused by the expert’s artificially slowing down the rate of knowledge transfer rather than by her reducing the total amount of knowledge eventually transferred. We show that these inefficiencies are larger the more patient the players are. Finally, we study the impact of knowledge externalities across players. This paper was produced as part of the Centre’s Productivity and Innovation Programme. The Centre for Economic Performance is financed by the Economic and Social Research Council. Acknowledgements We thank Steve Tadelis and participants at the 2013 meeting of the NBER Working Group on Organizational Economics for valuable suggestions. Luis Garicano is an Associate of the Centre for Economic Performance. He is also Professor (Chair) of Economics and Strategy, Department of Management and Department of Economics at the London School of Economics and Political Science. Luis Rayo is a Professor of Management at the London School of Economics and Political Science. Published by Centre for Economic Performance London School of Economics and Political Science Houghton Street London WC2A 2AE All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published. Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address.  L. Garicano and L. Rayo, submitted 2013 Relational Knowledge Transfers Luis Garicano Luis Rayo