Shirking, Sharing Risk, and Shelving: The Role of University License Contracts

39 Pages Posted: 11 Mar 2005 Last revised: 30 May 2021

See all articles by Marie C. Thursby

Marie C. Thursby

Georgia Institute of Technology - Strategic Management Area; National Bureau of Economic Research (NBER)

Jerry G. Thursby

Emory University - Department of Economics; Georgia Institute of Technology - Scheller College of Business

Emmanuel Dechenaux

Kent State University - Department of Economics

Date Written: February 2005

Abstract

In this paper, we develop a theoretical model of university licensing to explain why university license contracts often include payment types that differ from the fixed fees and royalties typically examined by economists. Our findings suggest that milestone payments and annual payments are common because moral hazard, risk sharing, and adverse selection all play a role when embryonic inventions are licensed. Milestones address inventor moral hazard without the inefficiency inherent in royalties. The potential for a licensee to shelve inventions is an adverse selection problem which can be addressed by annual fees if shelving is unintentional, but may require an upfront fee if the firm licenses an invention with the intention to shelve it. Whether the licensing contract prevents shelving depends in part on the university credibly threatening to take the license back from a shelving firm. This supports the rationale for Bayh-Dole march-in rights but also shows the need for the exercise of these rights can be obviated by contracts.

Suggested Citation

Thursby, Marie C. and Thursby, Jerry G. and Dechenaux, Emmanuel, Shirking, Sharing Risk, and Shelving: The Role of University License Contracts (February 2005). NBER Working Paper No. w11128, Available at SSRN: https://ssrn.com/abstract=666008

Marie C. Thursby (Contact Author)

Georgia Institute of Technology - Strategic Management Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jerry G. Thursby

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Emmanuel Dechenaux

Kent State University - Department of Economics ( email )

Kent, OH 44242
United States

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