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CONTRACTING FOR AN INNOVATION UNDER BILATERAL ASYMMETRIC INFORMATION *
Author(s) -
MARTIMORT DAVID,
POUDOU JEANCHRISTOPHE,
SANDZANTMAN WILFRIED
Publication year - 2010
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.1467-6451.2010.00421.x
Subject(s) - intellectual property , incentive , business , property rights , profit (economics) , value (mathematics) , industrial organization , quality (philosophy) , microeconomics , economics , computer science , philosophy , epistemology , machine learning , operating system
We analyze licensing contracts between informed innovators and developers exerting profit‐increasing effort. Those contracts must simultaneously induce innovators to convey information on the value of their ideas, while inducing developers to exert effort and protecting the innovators' intellectual property rights. We show that the best innovators signal themselves by taking more royalties even if it reduces the developers' share of returns and their incentives. Moreover, royalties are more likely to be used when property rights are easy to enforce and pre‐contractual evidence on innovation quality is hard to produce.