Optimal know-how transfers in licensing contracts

Pedro Mendi, Rafael Moner-Colonques () and José Sempere-Monerris
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Rafael Moner-Colonques: Universidad de Valencia

Journal of Economics, 2016, vol. 118, issue 2, No 2, 139 pages

Abstract: Abstract This paper studies optimal licensing contracts in the presence of moral hazard associated with costly provision of know-how by the licensor. In our setting, the target market is defined as the fraction of consumers that have a positive valuation for the product that is licensed. It is shown that, no matter how thin the target market is, know-how transfer always takes place. Consistent with actual practice, the optimal licensing contract includes a royalty on sales to attenuate the moral hazard problem. However, full know-how transfer will not occur for low enough maximum willingness to pay and high enough convexity of know-how cost. Finally, it is also shown that the effective (inclusive of the royalty) marginal cost exceeds the one when know-how transfer does not occur thus showing a potential malfunction of know-how transfer specially if the recipient is a developing country.

Keywords: Licensing; Know-how; Moral hazard (search for similar items in EconPapers)
JEL-codes: L14 O33 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:118:y:2016:i:2:d:10.1007_s00712-015-0468-y

DOI: 10.1007/s00712-015-0468-y

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