39 Pages Posted: 9 Mar 2016 Last revised: 12 Sep 2017
Date Written: September 8, 2017
Long-term or perpetual licenses give their owners incentives to invest in and maintain the common value of public resources, but may impede reallocation of resources to innovative entrants. Short-term licenses improve allocative efficiency at the cost of investment incentives. We propose depreciating licenses, a system that navigates the allocative-investment tradeoff more efficiently. Licensees annually announce valuations at which they commit to sell their licenses, and pay a percent of these valuations as license fees. Depreciating licenses induce high and time-stationary investment incentives. The self-assessed license fee encourages value revelation and improves allocative efficiency. The only tuning parameter, the depreciation rate, can be chosen appropriately by targeting the observed probability of license turnover.
Appendix is available at: https://ssrn.com/abstract=3034480
Keywords: depreciating license, property rights, investment, misallocation, monopoly
JEL Classification: B51, C78, D42, D61, D82, K11
Suggested Citation: Suggested Citation