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Inefficiencies in the sale of ideas: theory and empirics

Author

Listed:
  • Marie-Laure Allain

    (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

  • Emeric Henry

    (Sciences Po - Sciences Po)

  • Margaret Kyle

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

Abstract

The sale of ideas (e.g. through licensing) facilitates vertical specialization and the division of labor between research and development. This specialization can improve the overall efficiency of the innovative process. However, these gains depend on the timing of the sale: the buyer of an idea should assume development at the stage at which he has an efficiency advantage. We show that in an environment with asymmetric information about the value of the idea and where this asymmetry decreases as the product is developed, the seller of the idea may delay the sale to the more efficient firm, thus incurring higher development costs. We obtain a condition for the equilibrium timing of the sale and examine how factors such as the intensity of competition between potential buyers influence it. Empirical analysis of licensing contracts signed between firms in the pharmaceutical industry supports our theoretical predictions.

Suggested Citation

  • Marie-Laure Allain & Emeric Henry & Margaret Kyle, 2011. "Inefficiencies in the sale of ideas: theory and empirics," Working Papers hal-00639128, HAL.
    • Handle: RePEc:hal:wpaper:hal-00639128
    Note: View the original document on HAL open archive server: https://hal.science/hal-00639128
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    References listed on IDEAS

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    1. Joshua S. Gans, 2014. "Negotiating for the Market," NBER Working Papers 20559, National Bureau of Economic Research, Inc.

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    Keywords

    Innovation; Licensing; Market structure; Bargaining; Pharmaceuticals; Biotechnology.; Biotechnology;
    All these keywords.

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