Licensing and Innovation with Imperfect Contract Enforcement

37 Pages Posted: 29 Mar 2015 Last revised: 21 Apr 2017

See all articles by Richard Gilbert

Richard Gilbert

University of California, Berkeley - Department of Economics

Eirik Gaard Kristiansen

NHH Norwegian School of Economics; Norwegian School of Economics (NHH) - Department of Economics

Date Written: April 4, 2017

Abstract

Licensing promotes technology transfer and innovation, but enforcement of licensing contracts is often imperfect. We model contract enforcement as a game with perfect information but probabilistic enforcement and explore the implications of weak enforcement on the design of licensing contracts, the conduct of firms and market performance. An upstream firm develops a technology that it can license to downstream firms using a fixed fee and a per-unit royalty. Strictly positive per-unit royalties maximize the licensor’s profit if competition among licensees limits joint profits. With imperfect enforcement, the licensor lowers variable royalties to reduce cheating. Although imperfect contract enforcement reduces the profits of the licensor, weak enforcement lowers prices, increases downstream innovation, and in some circumstances can increase total economic welfare.

Keywords: Licensing, competition, innovation, imperfect contract enforcement

JEL Classification: D43, K42, L14, L13

Suggested Citation

Gilbert, Richard J. and Kristiansen, Eirik Gaard, Licensing and Innovation with Imperfect Contract Enforcement (April 4, 2017). Available at SSRN: https://ssrn.com/abstract=2585999 or http://dx.doi.org/10.2139/ssrn.2585999

Richard J. Gilbert

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Eirik Gaard Kristiansen (Contact Author)

NHH Norwegian School of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 55 95 92 78 (Phone)
+47 55 95 95 43 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

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