Licensing Intellectual Property with Self-Reported Outcomes
35 Pages Posted: 28 Mar 2007 Last revised: 28 Sep 2010
Date Written: September 21, 2010
This study examines the effect of a firm’s information system on the use of intellectual property. We analyze the licensing of intellectual property in exchange for royalties that depend on the self-report of a licensee. Self-reporting gives rise to demand for auditing by the licensor or third-party attestation by the licensee. We characterize the optimal royalty contract, information system choice by the licensee, and audit strategy choice by the licensor. We find that the ability to use intellectual property in the most efficient way depends on the costs of the information system, the auditing process, and the attestation process. We find that variable royalty arrangements that depend on either audited self-reports or third-party attestation become more attractive as information system costs decrease and as the benefits from outsourcing the use of intellectual property increase. We also examine how the variability of payoffs to effort affects the optimal way the owner of the intellectual property uses it.
Keywords: Royalties, licensing, strategic auditing, contract compliance, forensic accounting
JEL Classification: D45, M42
Suggested Citation: Suggested Citation