Abstract

Internal or contractual production of highly creative products requires managers to assess both unobservable effort and uncertain output, leading to lack of cost control. Similarly, in procuring creative products in the marketplace, managers face the unavoidable winner's curse risk. Since this risk is, to a large extent, independent of the creative nature of the product, the higher the creative content, the higher the relative hazards associated with internal or contractual production. Thus, internal/contractual production of creative goods will tend to be less prevalent the higher the creative content associated with its production. The evolution of the U.S. film industry in the mid-20th century provides examples and implications for managing highly creative activities and ventures.