We develop a theory of control rights in the context of licencing interim innovative knowledge for further development, which is consistent with the inalienability of initial innovator's intellectual property rights. Control rights of a downstream development unit, a buyer of the interin innovation, arise from its ability to prevent the upstream research unit from forming financial coalitions at the ex interim stage of bargaining, over the amount and structure of licencing fees as well as the mode of licensing, based either in trade secrets or on patents. We model explicitly the equilibrium choice of the temporal structure of licensing fees, and show that the innovator's ex interim financial constraint is more likely to bind when then value of her innovation is low. By constraining the financial flexibility of the upstream unit vis-a-vis her choice over the mode of licensing of her interim knowledge, the controlling development unit is able to reduce the research unit's payoff selectively in such contingencies. This serves to incentivise the research unit to expend more effort ex ante, to generate more promising interim innovations. We further show that such interim-inefficient control rights can nevertheless be renegotiation-proof.
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number
dp618.
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