Technology licensing contracts and private information

Abstract

This paper examines technology licensing contracts under both adverse selection and moral hazard. We characterize the optimal licensing contract for the model in which the licensee has private information on demand and can exert efforts to increase the probability of having high demand. Specifically, we analyze a contract game in which first, a patent holding laboratory offers a licensing contract to the firm, and then the firm determines an effort to increase the probability of having high demand and finally the state is realized. We show that for the inefficient type of the firm, the second-best output is lower than lower the first-best and that the second-best effort level is lower the first-best. We also discuss fixed fee and two part tariff contracts. Furthermore we examine a setting in which the limited liability constraints can depend on the licensee's type and demonstrate that countervailing incentives can arise.