On the duration of technology licensing

We model an innovator's choice of payment scheme and duration as a joint decision in a multi-period licensing game with potential future innovations and some irreversibility of technology transfer. We find that it may be optimal to license the innovation for less than the full length of the patent and that royalty contracts can be more profitable than fixed-fee licensing even in the absence of information asymmetry and risk aversion. Moreover, licensing contracts based on royalty have a longer duration than fixed-fee licenses and are more likely to be used in industries where innovations are frequent and intellectual property protection is weak. Our paper also highlights an important link between the study of technology licensing and the theory of durable goods.

Research highlights► We analyze the duration of licensing contracts as well as the payment scheme. ► We focus on potential future innovations and irreversible technology transfers. ► We find that Licensing contracts based on royalty tend to have longer durations. ► Royalties are likely to be used if innovations are frequent and IP protection is weak.