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Licensed Unlicensed Requires Authentication Published by De Gruyter May 20, 2012

A Patent System with a Contingent Delegation Fee under Asymmetric Information

  • Weonseek Kim and Bonwoo Koo


Under the framework of a two-stage innovation process in which the first-stage innovation is commercialized by multiple firms at the second stage, this study proposes an optimal patent system for efficient commercialization by a lower cost firm when the R&D costs are private information. Under the existing patent system of granting patents sequentially to successful innovators, the commercialization can be achieved by an inefficient firm (called control loss) and duplicative R&D efforts may occur through competitive innovation race. This study shows that the problems of control loss and duplicative R&D efforts can be prevented if the patent office grants a patent with a mandatory contingent delegation fee only to the first innovator. A carefully designed contingent fee function can induce the first innovator to internalize the patent office’s objective function, leading to efficient commercialization by a lower cost firm.

Published Online: 2012-5-20

©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

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