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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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(This abstract was borrowed from another version of this item.)
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(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
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    References listed on IDEAS

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    Citations

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    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. 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.
    4. 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.
    5. Anastasios Dosis, 2022. "On the informed principal model with common values," RAND Journal of Economics, RAND Corporation, vol. 53(4), pages 792-825, December.
    6. 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.
    7. 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.
    8. Heiko Karle & Christian Staat, 2013. "Signaling Quality with Initially Reduced Royalty Rates," Working Papers ECARES ECARES 2013-44, ULB -- Universite Libre de Bruxelles.
    9. Oscar Mauricio Valencia, 2014. "Endogenous Growth and Research Activity under Private Information," Borradores de Economia 12169, Banco de la Republica.
    10. Jeon, Haejun, 2019. "Patent protection and R&D subsidy under asymmetric information," International Review of Economics & Finance, Elsevier, vol. 62(C), pages 332-354.
    11. 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.
    12. 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.
    13. Jose E. Gomez-Gonzalez & Oscar Mauricio Valencia, 2014. "Innovation and Growth under Private Information," Borradores de Economia 845, Banco de la Republica de Colombia.
    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.

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    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

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