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This paper develops a theory of firm boundaries in knowledge intensive industries by examining the incentive effects of knowledge sharing together with those stemming from transfer of control in mergers/acquisitions, joint ventures and strategic alliances. Since knowledge is non-rival in nature, its owners cannot restrict usage ex-post once they provide access ex-ante. Therefore, unlike physical asset-intensive firms, optimally deciding the ownership of knowledge assets as well as the degree of knowledge sharing is essential in knowledge-intensive firms. Giving one firm ownership of an asset enhances its incentives but reduces that of the firm losing ownership. In contrast, greater knowledge sharing enhances the incentives of both firms simultaneously.
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