The structure of payments as a way to alleviate contractual hazards in international technology licensing

This article proposes an empirical model in which the option of choosing between royalties, fixed payments or a combination of the two is made to mitigate contractual hazards in licensing contracts. We examine licensing contracts between Spanish and foreign firms during the 1960s and early 1970s using a new data source of 925 contracts. The link between patenting and licensing is also analyzed. The work provides evidence to support the hypothesis that the moral hazard problem truly influences the type of payment established in arm's-length contracts when there is an important technological gap between unaffiliated firms. This study also shows that the payment chosen depends on the size of the licensee firm.