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Competition and the Efficiency of Markets for Technology

  • Allain, Marie-Laure
  • Henry, Emeric
  • Kyle, Margaret

The sale of R&D projects through licensing facilitates the division of labor between research and development activities. This vertical specialization can improve the overall efficiency of the innovative process. However, these gains depend on the timing of the sale: the buyer of an R&D project should assume development at the stage at which he has an efficiency advantage. We show that in an environment where the seller is overconfident about the value of the project, she may delay the sale to the more efficient firm in order to provide verifiable information about its quality, though this delay implies higher total development costs for the project. We obtain a condition for the equilibrium timing of licensing and examine how factors such as the intensity of competition between potential buyers influence it. We show that a wide array of different explanations, based on differences in information, beliefs or risk profiles, lead to the same qualitative results. We present empirical evidence from pharmaceutical licensing contracts that is consistent with our theoretical predictions.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 13-416.

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Date of creation: Jul 2013
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Handle: RePEc:tse:wpaper:27399
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  1. Wuyts, S.H.K. & Dutta, S., 2008. "Licensing exchange : Insights from the biopharmaceutical industry," Other publications TiSEM 79c0c1a5-b48c-4de2-aa6f-6, Tilburg University, School of Economics and Management.
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  7. Choi, Jay Pil, 2001. "Technology transfer with moral hazard," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 249-266, January.
  8. Joshua S. Gans & David H. Hsu & Scott Stern, 2007. "The Impact of Uncertain Intellectual Property Rights on the Market For Ideas: Evidence From Patent Grant Delays," NBER Working Papers 13234, National Bureau of Economic Research, Inc.
  9. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
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  13. Sharmila Vishwasrao, 2004. "Royalties vs. fees: How do firms pay for foreign technology?," Working Papers 04023, Department of Economics, College of Business, Florida Atlantic University, revised Sep 2006.
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  19. James J. Anton & Dennis A. Yao, 2002. "The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 513-531.
  20. Oecd, 2004. "Competition Policy in Subsidies and State Aid," OECD Journal: Competition Law and Policy, OECD Publishing, vol. 6(1), pages 109-173.
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  23. Allain, Marie-Laure & Henry, Emeric & Kyle, Margaret K, 2011. "Inefficiencies in technology transfer: theory and empirics," CEPR Discussion Papers 8206, C.E.P.R. Discussion Papers.
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  25. Beggs, A. W., 1992. "The licensing of patents under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 171-191, June.
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