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Contracting for an Innovation under Bilateral Asymmetric Information

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

We analyze licensing contracts between informed innovators and developers exerting profit-increasing effort. Those contracts must simultaneously induce innovators to convey information on the value of their ideas, while inducing developers to exert effort and protecting the innovators' intellectual property rights. We show that the best innovators signal themselves by taking more royalties even if it reduces the developers' share of returns and their incentives. Moreover, royalties are more likely to be used when property rights are easy to enforce and pre-contractual evidence on innovation quality is hard to produce.

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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, May 2010, p. 324-348.
Handle: RePEc:ide:wpaper:1156
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  1. 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.
  2. Sudipto Bhattacharya & Jay R. Ritter, 1983. "Innovation and Communication: Signalling with Partial Disclosure," Review of Economic Studies, Oxford University Press, vol. 50(2), pages 331-346.
  3. 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.
  4. Choi, Jay Pil, 2001. "Technology transfer with moral hazard," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 249-266, January.
  5. Beggs, A. W., 1992. "The licensing of patents under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 171-191, June.
  6. Wilfried Sand-Zantman & David Martimort, 2006. "Signaling and the Design of Delegated Management Contracts for Public Utilities," Post-Print hal-00173938, HAL.
  7. Inderst, Roman, 2001. "Incentive schemes as a signaling device," Journal of Economic Behavior & Organization, Elsevier, vol. 44(4), pages 455-465, April.
  8. 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.
  9. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-65, November.
  10. repec:adr:anecst:y:1991:i:24:p:08 is not listed on IDEAS
  11. 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.
  12. Nancy T. Gallini, 1992. "Patent Policy and Costly Imitation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 52-63, Spring.
  13. Lacker, J.M., 1989. "Optimal Contracts Under Costly State Falsification," Purdue University Economics Working Papers 956, Purdue University, Department of Economics.
  14. 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 821-32, November.
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