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Contracting for an Innovation under Bilateral Asymmetric Information

Author

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

Abstract

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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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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    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. 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.
    5. 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.
    6. Nancy T. Gallini, 1992. "Patent Policy and Costly Imitation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 52-63, Spring.
    7. 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.
    8. Choi, Jay Pil, 2001. "Technology transfer with moral hazard," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 249-266, January.
    9. 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.
    10. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-1365, November.
    11. 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.
    12. 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.
    13. 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.
    14. Beggs, A. W., 1992. "The licensing of patents under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 171-191, June.
    15. repec:adr:anecst:y:1991:i:24:p:08 is not listed on IDEAS
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    Citations

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    Cited by:

    1. 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).
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Paul Castãneda Dower & Andrei Bremzen, 2012. "Almost Anonymous Implicit Contracting," Working Papers w0187, Center for Economic and Financial Research (CEFIR).
    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 012169, BANCO DE LA REPÚBLICA.
    10. Jose E. Gomez-Gonzalez & Oscar Mauricio Valencia, 2014. "Innovation and Growth under Private Information," Borradores de Economia 845, Banco de la Republica de Colombia.

    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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