*We thank for comments on a preliminary version participants to the following meetings and conferences: University of Grenoble (GAEL), 2005 EEA-Amsterdam, 2006 ESEM-Vienna, 2006 EARIE-Amsterdam and Humboldt Universität. We also thank two referees and two Editors for their insightful comments which much improved the paper. The usual disclaimer applies.
CONTRACTING FOR AN INNOVATION UNDER BILATERAL ASYMMETRIC INFORMATION*
Article first published online: 24 MAY 2010
© 2010 The Authors. Journal compilation © 2010 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics
The Journal of Industrial Economics
Volume 58, Issue 2, pages 324–348, June 2010
How to Cite
MARTIMORT, D., POUDOU, J.-C. and SAND-ZANTMAN, W. (2010), CONTRACTING FOR AN INNOVATION UNDER BILATERAL ASYMMETRIC INFORMATION. The Journal of Industrial Economics, 58: 324–348. doi: 10.1111/j.1467-6451.2010.00421.x
- Issue published online: 24 MAY 2010
- Article first published online: 24 MAY 2010
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.