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Contracting for an Innovation under Bilateral Asymmetric Information

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  • Martimort, David
  • Poudou, Jean-Christophe
  • Sand-Zantman, Wilfried

Abstract

This article analyzes the optimal contract design between an inventor and a developer. The inventor is privately informed on the value of his idea. The developer must exert some non-verifiable effort to improve the probability of success of this innovation but may also choose to opt out of the relationship upon learning the quality of the idea. While first-best efficiency requires that all marginal returns on innovation be left to the developer, second-best efficiency taking into account this bilateral asymmetric information leads to distort downwards the developer’s incentives to prevent innovators from overstating the value of their ideas. There exists a trade-off between inviting inventor to reveal their ideas and inducing both effort and participation from the developer. The extent of this trade-off depends on the regime of property rights on ideas, i.e., on how easy to steal ideas. Since decreasing the marginal share of developers makes it more difficult to have them participating to the contract, countervailing incentives might sometimes appear. Taking into account those various effects leads to reduce the responsiveness of the contract to the exact value of the idea and might force to give up additional rents to the developer. Some extensions of our framework, including the cases of limited commitment, partial disclosure and double moral hazard, are studied to show the robustness and limits of our previous findings.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 448.

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Date of creation: Jul 2009
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Publication status: Published in The Journal of Industrial Economics, vol. 58, n°2, mai 2010, p. 324-348.
Handle: RePEc:ide:wpaper:1156

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References

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  19. Martimort, D. & Sand-Zantman, W., 2004. "Signaling and the Design of Delegated Management for Public Utilities," Cahiers du LASER (LASER Working Papers) 2004.11, LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1.
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Citations

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Cited by:
  1. Martimort, David & Poudou, Jean-Christophe & Sand-Zantman, Wilfried, 2009. "Contracting and Ideas Disclosure in the Innovation Process," IDEI Working Papers 567, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Shirley J. , HO, 2007. "R&D Outsourcing Contract with Information Leakage," Discussion Papers (ECON - Département des Sciences Economiques) 2007026, Université catholique de Louvain, Département des Sciences Economiques.
  3. Fabrizi, Simona & Lippert, Steffen & Norbäck, Peh & Persson, Lars, 2008. "Venture Capitalists, Asymmetric Information, and Ownership in the Innovation Process," Working Paper Series 776, Research Institute of Industrial Economics.
  4. Evans, Shane, 2010. "Innovation contracts with leakage through licensing," Working Papers 10282, University of Tasmania, School of Economics and Finance, revised 05 Oct 2010.
  5. Bernhard Ganglmair & Luke M. Froeb & Gregory J. Werden, 2012. "Patent Hold-Up and Antitrust: How A Well-Intentioned Rule Could Retard Innovation," Journal of Industrial Economics, Wiley Blackwell, vol. 60(2), pages 249-273, 06.
  6. Paul Castãneda Dower & Andrei Bremzen, 2012. "Almost Anonymous Implicit Contracting," Working Papers w0187, Center for Economic and Financial Research (CEFIR).

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