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Optimal know-how transfers in licensing contracts

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  • Pedro MENDI
  • Rafael MONER-COLONQUES
  • José J. SEMPERE-MONERRIS

Abstract

This paper studies optimal licensing contracts in the presence of moral hazard associated with costly provision of know-how by the licensor. In our setting, the target market is defined as the fraction of consumers that have a positive valuation for the product that is licensed. It is shown that, no matter how thin the target market is, know-how transfer always takes place. Consistent with actual practice, the optimal licensing contract includes a royalty on sales to attenuate the moral hazard problem. However, full know-how transfer will not occur for low enough maximum willingness to pay and high enough convexity of know-how cost. Finally, it is also shown that the effective (inclusive of the royalty) marginal cost exceeds the one when know-how transfer does not occur thus showing a potential malfunction of know-how transfer specially if the recipient is a developing country.
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Suggested Citation

  • Pedro MENDI & Rafael MONER-COLONQUES & José J. SEMPERE-MONERRIS, 2016. "Optimal know-how transfers in licensing contracts," LIDAM Reprints CORE 2786, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:2786
    Note: In : Journal of Economics, 118, 121-139, 2016
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    Cited by:

    1. Mendi, Pedro & Moner-Colonques, Rafael & Sempere-Monerris, José J., 2020. "Cooperation for innovation and technology licensing: Empirical evidence from Spain," Technological Forecasting and Social Change, Elsevier, vol. 154(C).
    2. Tai‐Liang Chen & Zuyi Huang, 2020. "Technology licensing or cost‐reducing outsourcing? Game theoretical analysis on consumers' home bias effects and firms' optimal strategies," Bulletin of Economic Research, Wiley Blackwell, vol. 72(4), pages 417-433, October.

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    More about this item

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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