How Licensing Resolves Hold-Up: Evidence from a Dynamic Panel Data Model with Unobserved Heterogeneity

This paper is a study of licensing in a patent thicket. In a patent thicket licensing allows firms to avoid hold-up. It will have different effects on firms' R&D incentives depending on whether firms license existing or future patents. Building on a model of a patent portfolio race, firms' choice between these types of licensing contracts is modelled. We find that firms' relationships in product markets and technology space jointly determine the type of licensing contract chosen. We derive several hypotheses and test these. Using data from the semiconductor industry a dynamic panel data model with unobserved heterogeneity and a lagged dependent variable is estimated. A new method suggested by Wooldridge (2005) is employed to estimate a random effects probit model using conditional ML. The hypotheses derived from the theory are confirmed. Based on our results we argue that licensing raises welfare in the patent thicket.