Bidding the Inventions as Incentive Schemes and the Ownership Structure

In this study we consider the selling of an invention as an incentive scheme. The innovating firm sells the invention to other firms who are established in the product market. We consider a situation in which imperfect monitoring rules out the contractual mechanisms, and also royalty agreements. It is still possible to sell the invention through an auction mechanism. Actually the auction is used, because it maximizes the auctioneer’s (inventor’s) income. In situation considered it is required that the inventor also exerts some effort in the commercialization phase after the invention is sold. Owing to this post-trade effort, it may turn out to be beneficial to use the stocks of the product market firm in payment of the invention. This is implemented most easily through merger or acquisition. We show that the more effective the inventor’s own effort is in the commercialization phase, themorebeneficial for the inventor is that alternative which includes ownership arrangements, too. This alternative is attractive especially when the inventor acts as an auctioneer.Then the producer’s (informational) rents can be effectively decreased by limiting the producer’s own incentices to exert post-trade effort.