Screening and signalling for technology licensing: a comparison

This article studies, in an adverse selection set‐up, how a patentee licenses a new technology in a two‐period context where the licensee has private information on its marginal cost of production. Two different ways of licensing are considered: the patentee offers, in the first period, either a menu of contracts that screens the different types of licensee or a single contract that obliges the licensee to signal its true type. Of these two contracts, the better for the patentee depends on the probability of the innovation gives rise to a low marginal cost and the difference between the high and low cost. Findings explain, to some degree, the variety of licensing contracts observed in practice (some including only a fixed fee, and others including both a royalty and a fixed fee). This variety may be rationalised by the use of different devices (signalling or screening) aimed at alleviating the effects of opportunism. A welfare comparison of the two means for extracting hidden information from the licensee is also made.     

Prepayment Penalty as a Screening Mechanism for Default and Prepayment Risks

The objective of this article is to offer a theoretical model of asymmetric information to analyze the screening role of prepayment penalty. We consider both default risk and prepayment risk. What makes the role of prepayment penalty interesting and more complicated is that a borrower's contract choice could send conflicting signals to the lender about that borrower's default and prepayment risk type. This is different from earlier theoretical models of mortgage choice under asymmetric information where a certain aspect of the contract (e.g., discount points or loan‐to‐value ratio) is explored as a screening mechanism for a single risk dimension (default risk or prepayment risk) of the borrower type. We show the existence of separating equilibria where different default and prepayment risk types choose contracts with different combinations of prepayment penalty and interest rate. For certain parameter combinations, the model also generates a pooling equilibrium where all borrower types obtain the same contract. Our analysis could offer a partial explanation for the observation that contracts with prepayment penalties are a lot less prevalent than contracts with points.     

Licensing‐in fosters rapid invention! the effect of the grant‐back clause and technological unfamiliarity

Drawing on contractual economics and innovation management, licensing‐in is hypothesized to accelerate licensees' invention process. Studying a matched dataset of licensees and non‐licensees, licensees are shown to be faster at inventing, but the effect is negated if the license includes a grant‐back clause, shifting incentives from licensee to licensor. Also, the effect is significantly reduced if the licensee is unfamiliar with the licensed technology. The effect of the grant‐back clause is offset if the licensee is unfamiliar with the licensed technology, suggesting that the licensee retains the incentives to invent under these circumstances. Copyright © 2012 John Wiley & Sons, Ltd.     

Equity‐based incentives and collaboration in the modern multibusiness firm

Research summary : This paper examines the role of equity‐based incentives in fostering cross‐business‐unit collaboration in multibusiness firms. We develop a formal agency model in which headquarters offers equity and profit incentives to business‐unit managers with the objective of maximizing total expected firm returns. The resulting compensation contract provides a rich mechanism for aggregating value from collaborative interactions across business units, aligning managers' efforts with the firm's growth prospects and organization structure and managing the dual risks in profits and firm market value. The inclusion of equity incentives elicits higher levels of own‐unit and collaborative efforts over the profits‐only contract. Our results suggest that equity‐based incentives are most beneficial when profitability is uncertain relative to long‐term growth prospects, in firms pursuing related diversification strategies, and in periods of rising equity markets. Managerial summary : Equity‐based compensation such as restricted stock grants and options are increasingly common, not only for CEOs and other top executives, but also for business unit managers and other non‐C‐suite employees. The paper studies the role of such “global” incentives in enabling multibusiness firms to benefit from cross‐unit collaboration. Results from our model show that managerial contracts that include appropriate levels of equity incentives, in addition to profit‐based incentives, generate higher own‐unit and collaborative efforts. We also find that equity incentives are likely to be most beneficial for large firms in high‐growth sectors, for firms pursuing a related diversification strategy, and in periods of rising stock markets. The model can also provide useful guidance on designing return‐maximizing compensation contracts for business unit managers in different firm, organizational, and industry contexts. Copyright © 2015 John Wiley & Sons, Ltd.     

The Licensing of Market Development Rights within Technology Alliances: A Shareholder Value Perspective*

Technology alliances create market development rights that are shared between partners in an alliance relative to codeveloped product technology. Alliance partners will often manage the shared market development rights in a cooperative manner by forming an agreement in which one partner (i.e., the licensor) licenses its market development rights to the other partner in the alliance (i.e., the licensee). The real options and bargaining power literatures provide opposing recommendations regarding whether a licensor creates greater shareholder value by licensing its market development rights to the licensee on a more or less restrictive basis. Empirical analysis of technology alliance contracts reveals that the restrictiveness by which a licensor should license its market development rights to a licensee depends on the licensee's strategic marketing emphasis. Specifically, a licensee will create greater value by following a more restrictive distribution strategy when its partner's marketing strategy emphasizes value creation. Alternatively, a licensee will create greater value when its partner's marketing strategy emphasizes value appropriation by following a less restrictive distribution strategy. From a theoretical perspective, the paper's findings provide early evidence regarding the contribution of marketing strategy toward value creation in technology alliances and help resolve the differing expectations offered by the real options and bargaining power literatures. Managerially, the paper identifies an alliance partner's strategic marketing emphasis as a hitherto unrecognized factor determining when managers should follow a more or less restrictive distribution strategy when licensing marketing development rights within technology alliances.     

Coordinating a channel with asymmetric cost information and the manufacturer's optimality

In a manufacturer-retailer system with private retail cost information, we find that a set of incentive-compatible contracts consisting of wholesale and buyback prices can coordinate the channel for any retail cost. We then design two wholesale-buyback contracts by imposing a cutoff point on the retail cost. The first contract maximizes the manufacturer's expected profit while ensuring the channel is coordinated. The second contract assumes the same contractual structure without considering the effect on the channel. Both contracts are exactly solved. We find from numerical study that the manufacturer in the first contract can perform closely to the second one in many cases, and cases exist where both the manufacturer and the channel can do better in the first contract versus the second one.     

基于合约化质量管理框架下的质量创新模式研究

本文首先从现代合约理论出发，对传统质量概念中的合约化内涵进行发掘和深化，并进一步对质量合约的风险特征及原理进行讨论。在此基础上，进行质量创新理论的探析，研究表明：绝对质量价值管理、相对质量价值管理和证券化质量价值管理都是基于合约化质量理念下的质量创新的新模式——质量价值管理的三种形态，是在不同的竞争环境、不同的发展时期、具有不同质量风险特征的企业的不同选择而已。但从质量风险收益来看，证券化质量价值管理代表着质量创新模式的发展方向。     

Grantbacks,territorial restraints,and innovation

We analyse the effect of grantback clauses in licensing contracts. While competition authorities fear that grantback clauses might decrease the licensee's ex post incentives to innovate, a standard defence is that grantback clauses are required for the patent-owner to agree to license its technology in the first place. We examine the validity of this “but for” defence and the equilibrium effect of grantback clauses on the innovation incentives of the licensee for both non-severable and severable innovations, which roughly correspond to infringing and non-infringing innovations. We show that grantback clauses do not increase the patent-holder's incentives to license when non-severable innovations are at stake but they do when severable innovations are concerned – suggesting that the “but for” defence might be valid for severable innovations but not for non-severable ones, in direct contradiction to regulation in some jurisdictions. Moreover we show that, for severable innovations, grantback clauses can increase the range of parameters for which follow-on innovation by the licensee occurs. Our work extends the large literature on sequential innovation to an environment where information diffuses through licensing rather than through the mere act of patenting. In this different informational set up we show that Green and Scotchmer (1995)’s conclusion that the initial innovator should have a patent of infinite breadth no longer holds.     

Long-Term Contracts and Asset Specificity Revisited: An Empirical Analysis of Producer–Importer Relations in the Natural Gas Industry

This paper discusses long-term contracts as a particular organizational form situated somewhere between full vertical integration and short-term, market-based trading in the natural gas industry. We focus on the determinants of the duration of contracts under changing technical, economic, and institutional conditions. Using 311 long-term contracts we find that duration decreases as international market structures grow more competitive, and that contracts linked to an asset-specific investment extend, on average, three years longer.     

The Electricity Contract Market in England and Wales

In England and Wales, wholesale electricity is sold in a spot market partly covered by long-term contracts which hedge the spot price. Two dominant conventional generators can raise spot prices well above marginal costs, and this is profitable in the absence of contracts. If fully hedged, however, the generators lose their incentive to raise prices above marginal costs. Competition in the contract market could lead the generators to sell contracts for much of their output. Since privatisation the generators have indeed covered most of their sales in the contract market.     

Markups in a dual labour market: The case of the Netherlands

We follow the production function approach to assess markups, which requires the estimation of the output elasticity of a flexible input. In the basic setup we estimate a structural value added production function, using temporary contract hours as flexible input. We find rather stable markups in the Netherlands in the period 2006–2016. We show that extending the flexible input incorrectly with fixed contract hours results in an increasing markup. Findings are robust to an alternative setup, in which a gross output production function is specified and materials are used as flexible input. Implications for applied work and policy are discussed.     

How many franchises in a market?

This paper studies how firms use their number of franchises as a strategic tool. Firms can commit to high output by creating many franchises. However, signing a single franchise contract with a low wholesale price is an equally effective way to generate output. The value of granting many franchises is undercut when firms can sign contracts afterwards, so firms place only a single franchise in a market. This finding reverses previous results which did not model contracts. The same issues arise in international competition policy, where countries use anti-trust policy to affect their number of exporters and use subsidies to affect the choices of exporters.     

Non-Exclusive Dealing with Retailer Differentiation and Market Penetration

Retailer differentiation exists in most industries and gives manufacturers an incentive to contract with different retailers to penetrate a market. This paper analyzes the impact of this penetration effect on vertical contract exclusivity in an oligopolistic model with differentiated retailers. In the model, manufacturers endogenously choose contract types and negotiate with retailers on wholesale prices. We show that, when the penetration effect is sufficiently strong, non-exclusive contracts lead to higher profits for the manufacturers and retailers. The model is applied to an example with logit demand, which shows that both manufacturers choosing the non-exclusive contracts is a dominant-strategy Nash equilibrium even though they may both be better off under exclusive contracts when the products have high quality or low costs.     

Fixed‐Term Contracts: Short‐Term Blessings or Long‐Term Scars? Empirical Findings from the Netherlands 1980–2000

Using a comprehensive longitudinal dataset of prime‐age Dutch workers over the period 1980–2000, we examine how a previously held job with a fixed‐term contract influences both the likelihood and the duration of a future spell of unemployment. Analyses show that Dutch workers with fixed‐term contracts experience higher risks of future unemployment and have no shorter spells of unemployment compared to workers with regular contracts. Results also reveal that swifter employment re‐entries among men with fixed‐term contracts can be explained by their job search efforts before unemployment. Our study (partly) invalidates theoretical positions that claim that fixed‐term contracts foster employment security by shortening unemployment durations; suggesting that fixed‐term contracts are a short‐term blessing that could end, for some workers, in a recurrent unemployment trap.     

Servicer Contracts and the Design of Mortgage‐Backed Security Pools

We develop a unified model of mortgage and servicer contracts. Renegotiating mortgage contracts following default is strictly Pareto improving, if the lender gathers updated information. An incentive compatible servicer contract requires the servicer to hold a risk position that has a value strictly greater than the cost of exerting effort. This risk position cannot in general be approximated with a horizontal “first‐loss” position. An alternative, forming a nondiversified pool, preserves pool‐wide information, avoids the cost of an incentive compatible servicer contract, and may increase MBS value.     

Training and Labour Market Flexibility: Is There a Trade-off?

This paper explores the nexus between work-related training and labour market 'flexibility' (which we proxy by contract type, part-time employment and lack of union coverage), using the first five waves of the British Household Panel Survey (BHPS) conducted over the period 1991–5. Our results show that workers on short-term employment contracts, who are working part-time or are not covered by a union collective agreement, are significantly less likely to be involved in any work-related training to improve or increase their skills. These findings suggest that there is a trade-off between expanding the more marginal forms of employment and expanding the proportion of the work-force getting work-related training.     

Language as a barrier to entry: Foreign competition in Georgian public procurement

Provision of government contract information in English reduces the barriers to participation by foreign suppliers. We measure this effect using data from the country of Georgia, where English translations of government tenders were provided above specified contract size thresholds, which varied over time and across contract types. The provision of English documentation more than doubles foreign company participation for low value contracts, and leads to smaller, though still substantial, increases for higher value contracts. Because foreign bidder participation in Georgia is relatively small, the resulting impact on prices is in the order of only one percent.     

Currency Swaps and International Real Estate Investment

This paper examines the efficacy of currency swaps as a hedging mechanism for the exchange rate risk associated with foreign investment in real estate. Earlier studies have concentrated on short-term hedging instruments such as options and forward contracts. Currency swaps are better suited for use on investments with long-term holding periods such as real estate. The findings indicate that, although hedging United States real estate investments with currency swaps suppresses most of the risk induced by currency instability, the improvements are insufficient to produce diversification gains for foreign investors in the context of mean-variance portfolio performance.     

Myopic Corporate Behaviour with Optimal Management Incentives

Existing models in which stock markets lead to corporate 'short-termism' rely on an exogenously imposed objective for top managers. This paper endogenizes both managers' concern for short-term stock prices and the resulting distortions. We show that when the manager can trade on her own account on the stock market in a way that is observable to market participants but which is not verifiable in court, shareholders will choose an incentive contract which induces a bias towards short-term returns. Consistent with recent evidence, the short-term bias is greater when the optimal contract provides low-powered management incentives.     

Exclusionary discounts

We consider a two-period model with two sellers and one buyer. Although we assume it is efficient for the buyer to purchase from both sellers in each period, we show that when the buyer's valuations are inter-temporally linked and at least one seller is financially constrained, exclusion can sometimes arise in equilibrium (i.e., the buyer purchases all of its requirements from the same seller in each period). The exclusionary equilibria are supported by contract offers in which the excluding seller's incremental price to supply the contestable part of demand is below its marginal cost and sometimes negative. Our findings contribute to the literatures on market-share contracts, bundling, all-units discounts, and loyalty discounts.