Shirking, sharing risk, and shelving

Marie Thursby

"University license contracts are more complex than the fixed fees and royalties typically examined by economists. We provide theoretical and empirical evidence that suggests milestones, annual payments, and consulting are common because moral hazard, risk sharing, and adverse selection all play a role when embryonic inventions are licensed. Milestones address inventor moral hazard without the inefficiency inherent in royalties. Royalties are optimal only when the licensee is risk averse. The potential for a licensee to shelve inventions is an adverse selection problem which can be addressed by annual fees if shelving is unintentional, but requires milestones if the firm licenses an invention with the intention to shelve it. Whether annual fees or milestones prevent shelving depends on the university credibly threatening to take the license back from a shelving firm. When such a...