Inventor Moral Hazard in University Licensing: The Role of Contracts

Abstract

We examine commonly observed forms of payment, such as milestones, royalties, or consulting contracts as ways of engaging inventors in the development of licensed inventions. Our theoretical model shows that when milestones are feasible, royalties are not optimal unless the licensing firm is risk averse. The model also predicts the use of consulting contracts which improve the firm's ability to monitor inventor effort. Because these contracts increase the firm's expected profits, the upfront fee that the university can charge is higher than otherwise. These results therefore support the commonly observed university policy of allowing faculty to consult with licensing firms outside of their university contracts. They also support firm policies of including milestones. An empirical analysis based on a survey of 112 businesses that license-in university inventions supports the complementarity of milestones and consulting suggested by the theory.

The Role of Equity, Royalty, and Fixed Fees in Technology Licensing to University Spin-Offs

“…To simplify the analysis, we employ a specific functional form for the probability of success p f = 1 − exp −f . This assumption, which is similar to that in Dechenaux et al (2011), ensures that p f is indeed a probability (i.e., 0 ≤ p ≤ 1), and that it is increasing and strictly concave in effort, f . More specifically, the payoff of the spin-off that exerts effort f , produces quantity Q, pays a fixed fee F and royalties r, and retains an equity stake e becomes where is the cost of unit effort.…”

“…Clearly, this is a simplification, because the university technology being transferred is often too embryonic for immediate commercialization. In a survey of leading TTOs, Jensen and Thursby (2001) report that 88% of technologies licensed required further development, with over 75% of them no more advanced than lab-scale prototypes requiring substantial effort to overcome hurdles such as manufacturing feasibility (Dechenaux et al 2011). This effort, which must be exerted by the management and the scientists of the spin-off, is costly both in terms of capital costs incurred and the time required for further development.…”

“…Therefore, assuming that 0 ≤ c < + m, the value of the spin-off company is maximized at production level Q = m + − c / 4 and is equal to m + − c 2 / 8 − C. In the context of the problem we are studying, the spin-off has to license the technology from the TTO, which is the legal owner of the technology. Previous work in university technology transfer assumes that the TTO represents the interests of both the university's central administration and the university members that created the technology Dechenaux et al 2009Dechenaux et al , 2011. This is a reasonable assumption in the context of licensing to incumbents because the creators of the technology are unlikely to have direct involvement with the licensee.…”

“…Various other reasons for the coexistence of royalties and fixed fees have also been identified in the literature. In a model with inventor moral hazard, Dechenaux et al (2009) and Dechenaux et al (2011) argue that royalties become optimal only when the licensee is risk averse. Erat et al (2013) find that royalties should coexist with fixed fees to moderate downstream competition among licensees, while Sen and Stamatopoulos (2009) argue that royalties coexist with fixed fees to raise the market price back to monopoly prices.…”

Determinants of R&D Commercialization by SMEs after Technology Transfer

“…Dechenaux andThursby (2011) andThursby (2011) pointed out that the contract contents and moral hazard are important factors for the success of the technology transferred. They found that 93% of transferred technologies needed further R&D, and the failure ratio was 72%.…”