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Innovation contracts with leakage through licensing

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Abstract

In this paper a Developer contracts with a Researcher for the production of a non-drastic innovation. Since effort is non-contractible, the Developer offers an incentive contract dependent on the observed magnitude of the innovation. It is shown that the distribution of intellectual property rights (IPR) ownership does not affect the level of effort exerted for innovations where the Developer would choose to license the innovation to its competitors. This is because the possibility of leakage of the innovation through licensing subsidies the Developer's payment when IPR is delegated to the Researcher, while at the same time eroding its profit.

Suggested Citation

  • 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.
    • Handle: RePEc:tas:wpaper:10282
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    File URL: http://eprints.utas.edu.au/10282/1/DP2010_11_Evans_Innovation_Oct_2010.pdf
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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