Inventor Moral Hazard in University Licensing: The Role of Contracts

30 Pages Posted: 18 Aug 2008 Last revised: 29 Oct 2015

See all articles by Emmanuel Dechenaux

Emmanuel Dechenaux

Kent State University - Department of Economics

Jerry G. Thursby

Emory University - Department of Economics; Georgia Institute of Technology - Scheller College of Business

Marie C. Thursby

Georgia Institute of Technology - Strategic Management Area; National Bureau of Economic Research (NBER)

Date Written: August 2008

Abstract

We examine commonly observed forms of payment, such as milestones, royalties, or consulting contracts as ways of engaging inventors in the development of licensed inventions. Our theoretical model shows that when milestones are feasible, royalties are not optimal unless the licensing firm is risk averse. The model also predicts the use of consulting contracts which improve the firm's ability to monitor inventor effort. Because these contracts increase the firm's expected profits, the upfront fee that the university can charge is higher than otherwise. These results therefore support the commonly observed university policy of allowing faculty to consult with licensing firms outside of their university contracts. They also support firm policies of including milestones. An empirical analysis based on a survey of 112 businesses that license-in university inventions supports the complementarity of milestones and consulting suggested by the theory.

Suggested Citation

Dechenaux, Emmanuel and Thursby, Jerry G. and Thursby, Marie C., Inventor Moral Hazard in University Licensing: The Role of Contracts (August 2008). NBER Working Paper No. w14226. Available at SSRN: https://ssrn.com/abstract=1230853

Emmanuel Dechenaux

Kent State University - Department of Economics ( email )

Kent, OH 44242
United States

Jerry G. Thursby

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Marie C. Thursby (Contact Author)

Georgia Institute of Technology - Strategic Management Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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