Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 5/2015: Licensing and Innovation with Imperfect Contract Enforcement.

Richard Gilbert () and Eirik Gaard Kristiansen ()
Additional contact information
Richard Gilbert: University of California, Berkeley, Postal: Department of Economics, , University of California, , Berkeley,
Eirik Gaard Kristiansen: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway

Abstract: Licensing promotes technology transfer and innovation, but enforcement of licensing contracts is often imperfect. We explore the implications of weak enforcement of contractual commitments on the licensing conduct of firms and market performance. An upstream firm develops a technology that it can license to downstream firms using a fixed fee and a per-unit royalty. Strictly positive per-unit royalties maximize the licensor’s profit if competition among licensees limits joint profits. Although imperfect contract enforcement lowers the profits of the upstream firm, weak enforcement lowers prices, increases downstream innovation, and in some circumstances can increase total economic welfare.

Keywords: Licensing; competition; innovation; imperfect contract enforcement.

JEL-codes: D43; K42; L13; L14

26 pages, March 26, 2015

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