IDEAS home Printed from https://ideas.repec.org/p/ide/wpaper/1156.html
   My bibliography  Save this paper

Contracting for an Innovation under Bilateral Asymmetric Information

Author

Listed:
  • 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.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Martimort, David & Poudou, Jean-Christophe & Sand-Zantman, Wilfried, 2009. "Contracting for an Innovation under Bilateral Asymmetric Information," IDEI Working Papers 448, Institut d'Économie Industrielle (IDEI), Toulouse.
    • Handle: RePEc:ide:wpaper:1156
    as

    Download full text from publisher

    File URL: http://idei.fr/sites/default/files/medias/doc/by/martimort/contracting_innovation.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-1363, December.
    2. Anton, James J & Yao, Dennis A, 1994. "Expropriation and Inventions: Appropriable Rents in the Absence of Property Rights," American Economic Review, American Economic Association, vol. 84(1), pages 190-209, March.
    3. Inderst, Roman, 2001. "Incentive schemes as a signaling device," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 455-465, April.
    4. Fabrizi, Simona & Lippert, Steffen & Norback, Pehr-Johan & Persson, Lars, 2007. "Venture Capitalists, Asymmetric Information and Ownership in the Innovation Process," MPRA Paper 6265, University Library of Munich, Germany.
    5. Bhattacharya, Sudipto & Glazer, Jacob & Sappington, David E. M., 1992. "Licensing and the sharing of knowledge in research joint ventures," Journal of Economic Theory, Elsevier, vol. 56(1), pages 43-69, February.
    6. Beaudry, Paul, 1994. "Why an Informed Principal May Leave Rents to an Agent," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 821-832, November.
    7. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626, National Bureau of Economic Research, Inc.
    8. Andrew F. Daughety & Jennifer F. Reinganum, 2013. "Search, bargaining, and signalling in the market for legal services," RAND Journal of Economics, RAND Corporation, vol. 44(1), pages 82-103, March.
    9. Nancy T. Gallini, 1992. "Patent Policy and Costly Imitation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 52-63, Spring.
    10. Inés Macho-Stadler & David Perez-Castrillo, 1991. "Contrats de licences et asymétrie d'information," Annals of Economics and Statistics, GENES, issue 24, pages 189-208.
    11. Choi, Jay Pil, 2001. "Technology transfer with moral hazard," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 249-266, January.
    12. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
    13. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-1365, November.
    14. David Martimort & Wilfried Sand‐Zantman, 2006. "Signalling and the design of delegated management contracts for public utilities," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 763-782, December.
    15. Simona Fabrizi & Steffen Lippert & Pehr-Johan Norbäck & Lars Persson, 2013. "Venture Capitalists and the Patenting of Innovations," Journal of Industrial Economics, Wiley Blackwell, vol. 61(3), pages 623-659, September.
    16. Sudipto Bhattacharya & Jay R. Ritter, 1983. "Innovation and Communication: Signalling with Partial Disclosure," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(2), pages 331-346.
    17. Nancy T. Gallini & Brian D. Wright, 1990. "Technology Transfer under Asymmetric Information," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 147-160, Spring.
    18. Beggs, A. W., 1992. "The licensing of patents under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 171-191, June.
    19. 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, June.
    20. repec:adr:anecst:y:1991:i:24:p:08 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Paul Castãneda Dower & Andrei Bremzen, 2012. "Almost Anonymous Implicit Contracting," Working Papers w0187, Center for Economic and Financial Research (CEFIR).
    2. Jeon, Haejun, 2019. "Licensing and information disclosure under asymmetric information," European Journal of Operational Research, Elsevier, vol. 276(1), pages 314-330.
    3. Anastasios Dosis, 2022. "On the informed principal model with common values," RAND Journal of Economics, RAND Corporation, vol. 53(4), pages 792-825, December.
    4. Evans, Shane, 2010. "Innovation contracts with leakage through licensing," Working Papers 10282, University of Tasmania, Tasmanian School of Business and Economics, revised 05 Oct 2010.
    5. Oscar Mauricio Valencia, 2014. "Endogenous Growth and Research Activity under Private Information," Borradores de Economia 12169, Banco de la Republica.
    6. Martimort, David & Poudou, Jean-Christophe & Sand-Zantman, Wilfried, 2009. "Contracting and Ideas Disclosure in the Innovation Process," TSE Working Papers 09-053, Toulouse School of Economics (TSE).
    7. Fabrizi, Simona & Lippert, Steffen & Norback, Pehr-Johan & Persson, Lars, 2007. "Venture Capitalists, Asymmetric Information and Ownership in the Innovation Process," MPRA Paper 6265, University Library of Munich, Germany.
    8. Simona Fabrizi & Steffen Lippert & Pehr-Johan Norbäck & Lars Persson, 2013. "Venture Capitalists and the Patenting of Innovations," Journal of Industrial Economics, Wiley Blackwell, vol. 61(3), pages 623-659, September.
    9. Jose E. Gomez-Gonzalez & Oscar Mauricio Valencia, 2014. "Innovation and Growth under Private Information," Borradores de Economia 845, Banco de la Republica de Colombia.
    10. Nicholas Charles Bedard, 2017. "Contracts in informed-principal problems with moral hazard," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(1), pages 21-34, April.
    11. 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, June.
    12. Heiko Karle & Christian Staat, 2013. "Signaling Quality with Initially Reduced Royalty Rates," Working Papers ECARES ECARES 2013-44, ULB -- Universite Libre de Bruxelles.
    13. Jeon, Haejun, 2019. "Patent protection and R&D subsidy under asymmetric information," International Review of Economics & Finance, Elsevier, vol. 62(C), pages 332-354.
    14. Pénin, Julien, 2012. "Strategic uses of patents in markets for technology: A story of fabless firms, brokers and trolls," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 633-641.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sudipto Bhattacharya & Claude d’Aspremont & Sergei Guriev & Debapriya Sen & Yair Tauman, 2014. "Cooperation in R&D: Patenting, Licensing, and Contracting," International Series in Operations Research & Management Science, in: Kalyan Chatterjee & William Samuelson (ed.), Game Theory and Business Applications, edition 2, chapter 0, pages 265-286, Springer.
    2. Amir, Rabah & Encaoua, David & Lefouili, Yassine, 2014. "Optimal licensing of uncertain patents in the shadow of litigation," Games and Economic Behavior, Elsevier, vol. 88(C), pages 320-338.
    3. Jeon, Haejun, 2019. "Patent protection and R&D subsidy under asymmetric information," International Review of Economics & Finance, Elsevier, vol. 62(C), pages 332-354.
    4. Pedro Mendi & Rafael Moner-Colonques & José J. Sempere-Monerris, 2016. "Optimal know-how transfers in licensing contracts," Journal of Economics, Springer, vol. 118(2), pages 121-139, June.
    5. Sen, Debapriya & Tauman, Yair, 2007. "General licensing schemes for a cost-reducing innovation," Games and Economic Behavior, Elsevier, vol. 59(1), pages 163-186, April.
    6. Sen, Debapriya, 2005. "On the coexistence of different licensing schemes," International Review of Economics & Finance, Elsevier, vol. 14(4), pages 393-413.
    7. Nisvan Erkal, 2005. "Optimal Licensing Policy in Differentiated Industries," The Economic Record, The Economic Society of Australia, vol. 81(252), pages 51-60, March.
    8. Deepak Hegde & Hong Luo, 2018. "Patent Publication and the Market for Ideas," Management Science, INFORMS, vol. 64(2), pages 652-672, February.
    9. Jean-François Sattin, 2016. "Exploring the survival of patent licensing: some evidence from French foreign agreements," The Journal of Technology Transfer, Springer, vol. 41(3), pages 610-630, June.
    10. Debapriya Sen & Giorgos Stamatopoulos, 2009. "Technology Transfer Under Returns To Scale," Manchester School, University of Manchester, vol. 77(3), pages 337-365, June.
    11. Nicos Savva & Niyazi Taneri, 2015. "The Role of Equity, Royalty, and Fixed Fees in Technology Licensing to University Spin-Offs," Management Science, INFORMS, vol. 61(6), pages 1323-1343, June.
    12. Arijit Mukherjee, 2010. "Technology licensing under convex costs," Discussion Papers 10/05, University of Nottingham, School of Economics.
    13. Martimort, David & Poudou, Jean-Christophe & Sand-Zantman, Wilfried, 2009. "Contracting and Ideas Disclosure in the Innovation Process," TSE Working Papers 09-053, Toulouse School of Economics (TSE).
    14. Mukherjee, Arijit, 2010. "Licensing a new product: Fee vs. royalty licensing with unionized labor market," Labour Economics, Elsevier, vol. 17(4), pages 735-742, August.
    15. Rabah Amir & David Encaoua & Yassine Lefouili, 2011. "Per-Unit Royalty vs Fixed Fee: The Case of Weak Patents," Working Papers halshs-00595493, HAL.
    16. Zhao, Dan, 2017. "Choices and impacts of cross-licensing contracts," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 389-405.
    17. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
    18. Arora, Ashish & Gambardella, Alfonso, 2010. "The Market for Technology," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 641-678, Elsevier.
    19. Heiko Karle & Christian Staat, 2013. "Signaling Quality with Initially Reduced Royalty Rates," Working Papers ECARES ECARES 2013-44, ULB -- Universite Libre de Bruxelles.
    20. Sougata Poddar & Uday Bhanu Sinha, 2004. "On Patent Licensing in Spatial Competition," The Economic Record, The Economic Society of Australia, vol. 80(249), pages 208-218, June.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ide:wpaper:1156. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/idtlsfr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.