Shirking, sharing risk and shelving: The role of university license contracts

Abstract

a b s t r a c tIn this paper, we develop a theoretical model of university licensing to explain why university license contracts often include payment types that differ from the fixed fees and royalties typically examined by economists. Our findings suggest that milestone payments and annual payments are common because moral hazard, risk sharing, and adverse selection all play a role when embryonic inventions are licensed. Milestones address inventor moral hazard without the inefficiency inherent in royalties. The potential for a licensee to shelve inventions is an adverse selection problem which can be addressed by annual fees if shelving is unintentional, but may require an upfront fee if the firm licenses an invention with the intention to shelve it. Whether the licensing contract prevents shelving depends in part on the university credibly threatening to take the license back from a shelving firm. This supports the rationale for Bayh-Dole march-in rights but also shows the need for the exercise of these rights can be obviated by contracts.

The Role of Equity, Royalty, and Fixed Fees in Technology Licensing to University Spin-Offs

“…Various other reasons for the coexistence of royalties and fixed fees have also been identified in the literature. In a model with inventor moral hazard, Dechenaux et al (2009) and Dechenaux et al (2011) argue that royalties become optimal only when the licensee is risk averse. Erat et al (2013) find that royalties should coexist with fixed fees to moderate downstream competition among licensees, while Sen and Stamatopoulos (2009) argue that royalties coexist with fixed fees to raise the market price back to monopoly prices.…”

“…Therefore, assuming that 0 ≤ c < + m, the value of the spin-off company is maximized at production level Q = m + − c / 4 and is equal to m + − c 2 / 8 − C. In the context of the problem we are studying, the spin-off has to license the technology from the TTO, which is the legal owner of the technology. Previous work in university technology transfer assumes that the TTO represents the interests of both the university's central administration and the university members that created the technology Dechenaux et al 2009Dechenaux et al , 2011. This is a reasonable assumption in the context of licensing to incumbents because the creators of the technology are unlikely to have direct involvement with the licensee.…”

Bench-to-Bench Bottlenecks in Translation

“…However, these incentive mechanisms might have the unintended consequence of diverting the attention of academic scientists away from basic research and toward clinical development (7,8). Not only is there the real possibility of diversion of faculty effort, licenses also frequently include terms that impede the dissemination of knowledge.…”

The governance of formal university–industry interactions: understanding the rationales for alternative models

“…However, studies that explicitly consider formal academic consulting activity as a distinct knowledge transfer channel highlight its importance (see e.g. Rebne, 1989;Cohen et al, 2002;Beath et al, 2003;Perkmann and Walsh, 2008;Jensen et al, 2010) and suggest that consulting includes a wide range of activities linked to the exploitation of existing knowledge, the commercialization of research results and the performance of original research (Perkmann and Walsh, 2008;Dechenaux et al, 2007).…”