Technology Transfer under Asymmetric Information

Licensing contracts for newly patented innovations are observed to vary along several dimensions, including the form and size of the payment to the inventor (fixed fee versus some output-based royalty), the degree of exclusivity, and the division of rents. In this article, we show that the form of the contract can be explained by two problems in technology exchange: the superiority of a licensor's precontractual information about the economic value of the innovation and the fact that sharing this information with the licensee may facilitate imitation. We show that a licensor signals her technology type with an output-based payment (or royalty) and may leave some of the rents with the licensee. Conditions under which exclusive license contracts (linear and nonlinear) and nonexclusive linear contracts are used to transfer technology are identified.