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Contribution-proportional remuneration rule for employee inventions and its effects on effort and investment incentives

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  • Yoshihito Yasaki
  • Akira Goto

Abstract

The practice of the Japanese court in case of a dispute between the employer and employee regarding the amount of remuneration for an employee invention has been to order that the additional profit from the invention be divided proportionally to their respective input contributions. We show that, if the employer's investment and employee's effort are weakly complementary, this rule causes the share effect (excessive incentives on the part of each party to expend investment or effort in order to increase his/her share of the surplus) to dominate the probability effect (insufficient incentives arising from the fact that each party obtains only part of the increase in the expected surplus), and thus leads to excessive investment and effort relative to the joint-payoff-maximising levels. If the court cannot capture the employer's investment as fully as the employee's effort, the employer's investment may be too low compared to the joint-payoff-maximising level.

Suggested Citation

  • Yoshihito Yasaki & Akira Goto, 2006. "Contribution-proportional remuneration rule for employee inventions and its effects on effort and investment incentives," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 15(7), pages 665-678.
    • Handle: RePEc:taf:ecinnt:v:15:y:2006:i:7:p:665-678
    DOI: 10.1080/10438590500418976
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    References listed on IDEAS

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    1. Aghion, Philippe & Tirole, Jean, 1994. "Opening the black box of innovation," European Economic Review, Elsevier, vol. 38(3-4), pages 701-710, April.
    2. Philippe Aghion & Jean Tirole, 1994. "The Management of Innovation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1185-1209.
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