“Inefficiencies in the Sale of Ideas” by Margaret Kyle
Toulouse School of Economics
The sale of ideas through licensing facilitates the division of labor between research and development activities. This vertical 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, the seller of the idea may delay the sale to the more efficient firm in order to provide verifiable information about its quality, though this delay implies higher total development costs for the idea. We obtain a condition for the equilibrium timing of licensing and examine how factors such as the intensity of competition between potential buyers influence it. We present empirical evidence from pharmaceutical licensing contracts that is consistent with our theoretical predictions.