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Inefficiencies in the sale of ideas: theory and empirics

  • Marie-Laure Allain

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

  • Emeric Henry

    (Sciences Po - Department of Economics)

  • Margaret Kyle

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

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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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
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  1. Pedro Mendi, 2003. "The Structure of Payments in Technology Transfer Contracts: Evidence from Spain," Faculty Working Papers 05/03, School of Economics and Business Administration, University of Navarra.
  2. Joshua S. Gans & David H. Hsu & Scott Stern, 2008. "The Impact of Uncertain Intellectual Property Rights on the Market for Ideas: Evidence from Patent Grant Delays," Management Science, INFORMS, vol. 54(5), pages 982-997, May.
  3. Sean Nicholson, 2005. "Biotech-Pharmaceutical Alliances as a Signal of Asset and Firm Quality," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1433-1464, July.
  4. 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, June.
  5. Sharmila Vishwasrao, 2004. "Royalties vs. fees: How do firms pay for foreign technology?," Working Papers 04023, Department of Economics, College of Business, Florida Atlantic University, revised Sep 2006.
  6. Josh Lerner & Ulrike Malmendier, 2005. "Contractibility and the Design of Research Agreements," NBER Working Papers 11292, National Bureau of Economic Research, Inc.
  7. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919.
  8. Marie-Laure Allain & Emeric Henry & Margaret K. Kyle, 2011. "Inefficiencies in technology transfer: theory and empirics," Sciences Po publications 8206, Sciences Po.
  9. Howard Smith & John Thanassoulis, 2009. "Upstream Competition and Downstream Buyer Power," Economics Series Working Papers 420, University of Oxford, Department of Economics.
  10. 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.
  11. Choi, Jay Pil, 1996. "Technology Transfer with Moral Hazard," Economics Series 22, Institute for Advanced Studies.
  12. Beggs, A. W., 1992. "The licensing of patents under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 171-191, June.
  13. Anand, Bharat N & Khanna, Tarun, 2000. "The Structure of Licensing Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 48(1), pages 103-35, March.
  14. 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.
  15. Higgins, Matthew J., 2007. "The allocation of control rights in pharmaceutical alliances," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 58-75, March.
  16. repec:oup:restud:v:69:y:2002:i:3:p:513-31 is not listed on IDEAS
  17. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521816632.
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