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Inefficiencies in the sale of ideas: theory and empirics

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Author Info

  • Marie-Laure Allain

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Emeric Henry

    (Sciences Po - Department of Economics)

  • Margaret Kyle

    (TSE - Toulouse School of Economics - Toulouse School of Economics)

Abstract

The sale of ideas (e.g. through licensing) facilitates vertical specialization and the division of labor between research and development. This specialization can improve the overall efficiency of the innovative process. However, these gains depend on the timing of the sale: the buyer of an idea should assume development at the stage at which he has an efficiency advantage. We show that in an environment with asymmetric information about the value of the idea and where this asymmetry decreases as the product is developed, the seller of the idea may delay the sale to the more efficient firm, thus incurring higher development costs. We obtain a condition for the equilibrium timing of the sale and examine how factors such as the intensity of competition between potential buyers influence it. Empirical analysis of licensing contracts signed between firms in the pharmaceutical industry supports our theoretical predictions.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00639128.

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Date of creation: 08 Nov 2011
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Handle: RePEc:hal:wpaper:hal-00639128

Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00639128/en/
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Related research

Keywords: Innovation; Licensing; Market structure; Bargaining; Pharmaceuticals; Biotechnology.;

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References

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  1. Marie-Laure Allain & Margaret K. Kyle & Emeric Henry, 2011. "Inefficiencies in technology transfer: theory and empirics," Sciences Po publications 8206, Sciences Po.
  2. Anton, James J & Yao, Dennis A, 2002. "The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting," Review of Economic Studies, Wiley Blackwell, vol. 69(3), pages 513-31, July.
  3. Howard Smith & John Thanassoulis, 2009. "Upstream Competition and Downstream Buyer Power," Economics Series Working Papers 420, University of Oxford, Department of Economics.
  4. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  5. Pedro Mendi, 2005. "The Structure of Payments in Technology Transfer Contracts: Evidence from Spain," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(2), pages 403-429, 06.
  6. Josh Lerner & Ulrike Malmendier, 2005. "Contractibility and the Design of Research Agreements," NBER Working Papers 11292, National Bureau of Economic Research, Inc.
  7. Joshua S. Gans & David H. Hsu & Scott Stern, 2007. "The Impact of Uncertain Intellectual Property Rights on the Market For Ideas: Evidence From Patent Grant Delays," NBER Working Papers 13234, National Bureau of Economic Research, Inc.
  8. Vishwasrao, Sharmila, 2007. "Royalties vs. fees: How do firms pay for foreign technology?," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 741-759, August.
  9. Higgins, Matthew J., 2007. "The allocation of control rights in pharmaceutical alliances," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 58-75, March.
  10. Lerner, Josh & Merges, Robert P, 1998. "The Control of Technology Alliances: An Empirical Analysis of the Biotechnology Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(2), pages 125-56, June.
  11. Anand, Bharat N & Khanna, Tarun, 2000. "The Structure of Licensing Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 48(1), pages 103-35, March.
  12. Choi, Jay Pil, 2001. "Technology transfer with moral hazard," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 249-266, January.
  13. Sean Nicholson & Patricia M. Danzon & Jeffrey S. McCullough, 2002. "Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality," NBER Working Papers 9007, National Bureau of Economic Research, Inc.
  14. Beggs, A. W., 1992. "The licensing of patents under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 171-191, June.
  15. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, October.
  16. Ashish Arora & Andrea Fosfuri & Alfonso Gambardella, 2004. "Markets for Technology: The Economics of Innovation and Corporate Strategy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262511819, December.
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