“Our results show that the vast majority of university inventions are so embryonic that inventor cooperation in further development is crucial for commercial success.”

This paper offers both theoretical and empirical insights into the commercialization of university inventions allowed by the Bayh-Dole Act, which gives universities the right to license patents resulting from federally funded research by their faculty. This legislation, and its effects, is currently of keen interest not only to economists, but also to all academics whose research might have some commercial potential, and to all policy-makers who are interested in encouraging both the pace of inventive activity and the alacrity with which the benefits from technological change disseminate throughout society.

Our study provides striking evidence on both the nature of inventions licensed and the nature of contracts. Licensing contracts for university inventions typically include royalty payments to the university and inventor, which is an apparent conundrum because royalties are generally inefficient (suboptimal) for inventors. The theoretical analysis in the paper provides the first possible explanation for the use of royalties in university inventions. These inventions are so embryonic that additional development by the inventor is needed to ascertain their commercial potential, if any. Firms will not bear the risk of acquiring licenses unless they are confident that the inventors will participate in this further development. The use of royalties is one way to do this because they link inventor income to the commercial success of her/his invention.

Our results show that the vast majority of university inventions are so embryonic that inventor cooperation in further development is crucial for commercial success. For these inventions, this additional development will not occur unless the inventor's income is tied to the commercial success of the invention. This can be done with royalties, and in fact, our survey results show that the vast majority of agreements include royalty payments. It can also be done if the university and inventor take equity positions in the firms that acquire the licenses.

Both authors have had a long-standing interest in technological change. Jensen's prior research has focused on the diffusion of innovations, analyzing the determinants of the rate at which new technology is disseminated throughout society, and on the design of optimal strategies for the sale of licenses when inventors are profit-maximizing firms. Much of Thursby’s research has focused on the effects of public policy on technological innovation with an emphasis on how the ultimate effects of policy depend critically on the way policies frame incentives of decision makers. Given this background, and the growing importance of the Bayh-Dole Act, it was natural to consider the design of optimal strategies for the sale of licenses by universities and inventors, who are not profit-maximizers.