Managing Licensing in a Market for Technology

Abstract

Over the last decade, companies have paid greater attention to the management of their intellectual assets. We build a model that helps understand how licensing activity should be organized within large corporations. More specifically, we compare decentralization--where the business unit using the technology makes licensing decisions--to centralized licensing. The business unit has superior information about licensing opportunities but may not have the appropriate incentives because its rewards depend upon product market performance. If licensing is decentralized, the business unit forgoes valuable licensing opportunities since the rewards for licensing are (optimally) weaker than those for product market profits. This distortion is stronger when production-based incentives are more powerful, making centralization more attractive. Growth of technology markets favors centralization and drives higher licensing rates. Our model conforms to the existing evidence that reports heterogeneity across firms in both licensing propensity and organization of licensing.