CONTRACTING FOR AN INNOVATION UNDER BILATERAL ASYMMETRIC INFORMATION^*

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.

Contracts in informed-principal problems with moral hazard

“…A number of papers have studied the informed-principal problem with moral hazard: for example see Beaudry (1994), Chade and Silvers (2002), Kaya (2010), Martimort et al (2010), Silvers (2012), Inderst (2001) and Wagner et al (2015). To my knowledge, there has not been a characterization of the equilibria in this model without restricting the principal's contract choice.…”

“…A number of papers have analyzed the value of information in such environments; see for example (Beaudry 1994;Chade and Silvers 2002;1 Kaya 2010;Martimort et al 2010;and Silvers 2012;Inderst 2001) also studies this environment, but does not consider the value of the principal's information. These papers, however, restrict the set of contracts the principal can propose to the set of point-contracts; that is, contracts that depend only on observable outcomes, specifically, the success or failure of the project.…”

Venture Capitalists and the Patenting of Innovations

“…For an analysis of contracting issues between informed innovators and developers exerting profit‐increasing effort, see also Martimort et al . [].…”

“… See von Hippel [1988],Bower and Christensen [1996],Christensen et al [2001],Lanjouw and Schankerman [2001, 2004].3See Hellmann and Puri [2000],Brander et al [2002],Engel and Keilbach [2007],Shane and Cable [2002],Gans et al [2008],Keuschnigg and Nielsen [2007],Casamatta and Haritchabalet [2007a, 2007b],Cestone et al [2007],Cumming and Johan [2008], orMartimort et al [2010] for support of this hypothesis.4 For an analysis of contracting issues between informed innovators and developers exerting profit-increasing effort, see alsoMartimort et al [2010]. 5 SeeKaplan and Strömberg [2001],Casamatta [2003],Schmidt [2003],Inderst and Müller [2004],Keuschnigg and Nielsen [2004],Repullo and Suarez [2004],Hellmann [2006].6 We are grateful to the Editors for pointing this out.…”

Patent Hold‐Up and Antitrust: How A Well‐Intentioned Rule Could Retard Innovation

“…Our model does not have either the asymmetric information or the moral hazard that motivate the analysis of similar contracts by Martimort et al . [].…”