Efficient Compensation for Employees' Inventions
University of Magdeburg - Economics of Business and Law
Birgit E. Will
Saarland University - Center for the Study of Law and Economics
European Journal of Law and Economics, Vol. 21, No. 1, pp. 129-148, 2006
Center for the Study of Law and Economics Discussion Paper No. 2003-03
In Germany, employers can claim the right to any invention made by their employees, but have to pay a compensation if they do so. Recently this compensation was made subject to a legal reform proposal (and a new law concerning university employees).
We set up a simple Principal-Agent model to analyze the current and the new compensation schemes. Our model allows to derive a unique efficient payment scheme that consists of a contingent fixed payment only. We show that freedom to negotiate over the compensation after the invention provides inefficient incentives.
Efficiency requires the compensation to be fixed ex-ante, as it is provided by both the proposed law (concerning employees in general) and the new law (concerning university scholars). However, both set the payment schemes in an inefficient way. With suboptimal incentives to spend effort into inventions, the government's goal, an increase in the number of patents, is likely to be missed.
Keywords: Moral hazard, hold-up, efficient fixed wage
JEL Classification: K12, J33, C72Accepted Paper Series
Date posted: April 19, 2006
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