Licensing and Innovation with Imperfect Contract Enforcement

18 Pages Posted: 5 Jun 2018

See all articles by Richard Gilbert

Richard Gilbert

University of California, Berkeley

Eirik Gaard Kristiansen

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

Date Written: Summer 2018

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 avoid 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.

Suggested Citation

Gilbert, Richard and Kristiansen, Eirik Gaard, Licensing and Innovation with Imperfect Contract Enforcement (Summer 2018). Journal of Economics & Management Strategy, Vol. 27, Issue 2, pp. 297-314, 2018, Available at SSRN: https://ssrn.com/abstract=3188635 or http://dx.doi.org/10.1111/jems.12240

Richard Gilbert (Contact Author)

University of California, Berkeley ( email )

Department of Economics
530 Evans Hall #3880
Berkeley, CA 94720
United States
510 642 1507 (Phone)

Eirik Gaard Kristiansen

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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