Control Rights over intellectual property
Abstract
We consider an incomplete contracting model of bilateral trade in intellectual property (IP) with sequential investments in its quality and with financial constraints. A financially-constrained inventor invests in an idea which she then sells to a buyer. The buyer in turn invests in developing this idea into a marketable product. We propose a novel formulation of ex ante control rights of an IP buyer, over the financially-constrained IP seller. We do not assume alienability of the inventor’s ideas; the control right is defined as ex ante prescribed prohibition of ex interim financial contracting with third parties. We show that such an agreement strengthens the seller’s ex ante incentives to invest in the quality of her product which is to be traded at the interim stage. The enforcement of this control right is credible, or renegotiation-proof, only for the controlling buyer (a downstream user of the IP), and not for other potential partners of the seller, such as independent venture capitalists. We thereby obtain a rationale for a key role of Corporate Venturing in promoting innovative activities.