Licensing and information disclosure under asymmetric information

We examine a license contract in a vertically separated market in the presence of a competitor’s challenge and information asymmetry. When technology’s value is not observable, innovators with more valuable technology disclose their private information to receive a fair payment despite a rival’s earlier challenge, whereas the owner of less valuable technology reveals nothing. We show that the more valuable technology is and the less bargaining power the innovator has, the more information the innovator discloses. This finding is consistent with empirical evidence on inventors’ disclosure strategy after the American Inventors Protection Act (AIPA). Furthermore, we show that despite the information disclosure, innovators make R&D investment earlier than they would have under symmetric information. This is in contrast with conventional wisdom that the need to disclose complementary information may retard innovation, and can be explained by the interaction between the decisions of investment timing and information disclosure. Though the leading innovator suffers losses from information asymmetry, the total value of the firms in the market may increase due to the diffusion of knowledge.