Payment Schemes in Technology Licensing Agreements: A Transaction Cost Approach
28 Pages Posted: 27 Aug 2008
Date Written: July 19, 2008
This article provides an empirical assessment of payment schemes implemented in technology licensing agreements. We propose that differences in payment schemes reflect the ex ante measurement costs and the ex post contractual hazards existing in such agreements. We argue that such costs evolve with the quality of the protection provided to the licensor by the institutional environment and with the nature of what is exchanged. In order to test this, we use a new source of data (a French governmental database designed to observe international technology transfers) and we analyze the choice of royalties vs. lump sum payments. While we observe no clear effect of institutional environment on the way payment schemes are implemented, our empirical investigations highlight the key role played by the tacitness of the licensed knowledge. Our results suggest that collecting precise data as we did measuring what is exchanged might shed new lights on previous studies focusing only on sector differences. Furthermore, our results also show that in the case of technology transfers, because ex post contractual hazard appear to be particularly acute (i.e. termination is of no concern to the licensee once he has absorbed the relevant knowledge since such transfer is non-reversible), results in previous studies on other classes of transaction are not confirmed. This suggests that different payment scheme strategies should be retained depending on what is actually exchanged by contracting parties.
Suggested Citation: Suggested Citation