Working Paper: NBER ID: w11128
Authors: Marie Thursby; Jerry Thursby; Emmanuel Dechenaux
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.
Keywords: No keywords provided
JEL Codes: D82; L14; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| milestone payments (J33) | inventor moral hazard (G52) |
| annual fees (G29) | adverse selection (D82) |
| annual fees (G29) | commercialization outcomes (F61) |
| upfront fees (G24) | firm behavior (D21) |
| credibility of university's threat to take back licenses (A19) | shelving (Y90) |