Sudipto Bhattacharya () (NLondon School of Economics, and CEPR) Sergei Guriev () (Stockholm School of Economics, Stockholm; Centre for Economic and Financial Research (CEFIR), Moscow, and CEPR)
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We develop a theory of control rights in the context of licensing interim innovative knowledge for further development, which is consistent with the inalienability of initial innovator's intellectual property rights (IPR). Control rights of a downstream development unit, a buyer of the interim innovation, arise from his ability to prevent the upstream research unit from forming financial coalitions at the ex interim stage of bargaining, over the amount and structure of licensing fees as well as the mode of licensing, either based on trade secrets or via patenting. We model explicitly the equilibrium choice of the financial structure of licensing fees and show that the innovator's financial constraint is more likely to bind when the value of her innovation is low. By constraining the flexibility of the upstream unit regarding her choice of the mode of licensing of her interim knowledge, the controlling development unit is able to reduce the research unit's payoffs in such contingencies. This incentivises the research unit to expend costly e¤ort ex ante to generate more productive interim innovations. We show that such interim control rights can be renegotiation-proof.
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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number
w0118.
Length: 25 pages Date of creation: Apr 2008 Date of revision: Handle: RePEc:cfr:cefirw:w0118
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Find related papers by JEL classification: D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights K12 - Law and Economics - - Basic Areas of Law - - - Contract Law O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D
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