Hold-Up and Patent Licensing of Cumulative Innovations with Private Information
25 Pages Posted: 14 Mar 2002
Date Written: February 2002
When innovation is cumulative, early patentees hold claims against later innovators. Then potential hold-up may cause prospective second stage innovators to forego investing in R&D. It is sometimes argued that ex ante licensing (before R&D) avoids hold-up. This paper explores ex ante licensing when information about development cost is private. In this case, contracts may not be written ex ante. Moreover, the socially optimal division of profit occurs with weak patents and ex post licensing. Empirical evidence on licensing conforms to a model with private information. In some innovative industries, little ex ante licensing occurs, suggesting hold-up remains a problem.
Keywords: Patents, licensing, innovation, intellectual property
JEL Classification: K3, L5, O3
Suggested Citation: Suggested Citation