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Research summary: Acquiring knowledge on a partner's pre-existing resources plays an important yet ambiguous role in collaborative relationships. We formally model how contracts trade off productive and destructive uses of knowledge in a buyer-supplier relationship. We show that, when the buyer's pre-existing resources are vulnerable to the revelation of sensitive knowledge, the supplier overinvests in knowledge acquisition as it expects to use the knowledge as a threat in price negotiations. A non-renegotiable closed-price contract prevents such overinvestment and reduces the supplier's ability to expropriate the buyer ex post. Our results extend to the cases of renegotiable closed-price contracts, repeated interactions between a buyer and a supplier, and the use of nondisclosure policies. We draw theoretical, empirical, and managerial implications from our model. Managerial summary: This study yields new insights regarding the use of contract design in protecting pre-existing, nonrelationship specific assets in buyer-supplier arrangements. Anecdotal examples illustrate the 'dark side' of these arrangements where opportunistic suppliers exploit knowledge of buyers' pre-existing resources to seek rent and appropriate value. When a supplier is likely to act harmfully, a closed-price contract that specifies the price of the supplier's component upfront may reduce the supplier's incentives to overinvest in acquiring and exploiting knowledge of the buyer's pre-existing resources. As such, when a buyer's pre-existing resources are highly valuable, and thus more vulnerable to use by the supplier outside of the arrangement, a non-renegotiable closed-price contract is more efficient. Additionally, limited disclosure policies and informal agreements based on repeated interactions complement indirect governance via price contracts. Copyright © 2015 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]
