Knowledge Management Research & Practice
ISSN: 1477-8238 (Print) 1477-8246 (Online) Journal homepage: https://www.tandfonline.com/loi/tkmr20
Coordination contracts in the university
technology transfer chain
Xuhua Chang, Patrick S.W. Fong, Qiang Chen & Yongqian Liu
To cite this article: Xuhua Chang, Patrick S.W. Fong, Qiang Chen & Yongqian Liu (2019):
Coordination contracts in the university technology transfer chain, Knowledge Management
Research & Practice, DOI: 10.1080/14778238.2019.1596198
To link to this article: https://doi.org/10.1080/14778238.2019.1596198
Published online: 31 Mar 2019.
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KNOWLEDGE MANAGEMENT RESEARCH & PRACTICE
https://doi.org/10.1080/14778238.2019.1596198
Coordination contracts in the university technology transfer chain
Xuhua Changa, Patrick S.W. Fongb, Qiang Chenc and Yongqian Liuc
a
Shanghai International College of Intellectual Property, Tongji University, Shanghai, China; bDepartment of Building and Real Estate,
The Hong Kong Polytechnic University, Hung Hom, Hong Kong; cSchool of Economics & Management, Tongji University, Shanghai,
China
ABSTRACT
ARTICLE HISTORY
Successful university technology transfer requires close cooperation between the inventor
and the firm. However, occasionally, this cooperation is not self-conscious for both the
inventor and the firm. In this paper, we develop a game model by introducing the concept
of the university technology transfer chain. We examine the inventor’s and firm’s inputs and
payoffs in case of both the decentralised and centralised decision-making modes. Based on
the principal-agent theory, we find that the commonly used license contract with royalties or
equity payment cannot help effectively reduce the double moral hazard of both the inventor
and the firm, and the portfolio contract only works effectively because of the limitation of
transfer factor. The side-payment self-enforcing contract could coordinate the matched
inputs to achieve maximum social welfare. We also test these findings through numerical
investigation. Lastly, we present new insights for universities and firms as well as implications
for policymakers.
Received 28 April 2017
Revised 2 October 2018
Accepted 13 March 2019
1. Introduction
University-invented technology is critical for national
and regional innovation systems. However, the vast
majority of licensed university inventions are still in the
early technological stage and require further development. J.G. Thursby, Jensen, and Thursby (2001) indicated
that over half of the university inventions licensed in US
universities were merely a kind of proof-of-concept or
lab-scale prototype that still needed to pass the pilot scale
test before full-scale production. Hence, the commercialisation of university inventions often requires additional
effort from inventors who are employed by the university
(hereafter referred to as inventor effort) as well as
research & development (R&D) funding and technological investment (hereafter referred to as firm investment)
by a firm (Thompson, Ziedonis, & Mowery, 2018),
although neither is observable or verifiable.
The process of university-industry technology transfer
(hereafter referred to as UITT) is fraught with moral
hazards (Dechenaux, Thursby, & Thursby, 2011). Many
previous studies have indicated that inventors are motivated to participate in this transfer based on licensing
income as well as other non-economic factors, such as
entrepreneurship, reputation and research funding
(Littunen, 2000; Baldini, Grimaldi, & Sobrero, 2005;
J. G. Thursby & Thursby, 2011; Haeussler, Jiang,
J. G. Thursby, & Thursby, 2014; Chang, Chen, & Fong,
2017). The need for inventor effort results in the moral
hazard problem – for example, in case they turn their
attention to other research projects – mainly because of
CONTACT Xuhua Chang
China
15176@tongji.edu.cn
© 2019 Operational Research Society
KEYWORDS
University technology
transfer chain; double moral
hazard; portfolio contract;
side-payment self-enforcing
contract
incomplete licensing contracts that do not specify the
extent of effort needed in advance. Unreasonable distribution of patent licensing revenue and insufficient investment by licensees are other equally important reasons for
this in the context of royalty and/or equity payment
(Dechenaux, J. G. Thursby, & Thursby, 2011; Jensen &
Thursby, 2001; Macho-Stadler & Pérez-Castrillo, 2010;
Savva & Taneri, 2011). On the other hand, for firmaccepted university inventions, the need for investment
also presents a moral problem, since a firm may lower its
investment level either because it is keen to reduce
research costs or because the expected benefit is less
than originally anticipated (Choi, 2001; Jensen &
Thursby, 2001). Therefore, solving the moral hazard problem has drawn much attention in the academic field.
In order to eliminate the moral hazard problem
in case of inventors, Jensen, Thursby, and Thursby
(2003) indicated that the inventor’s effort increases
along with the inventor’s share of licensing revenue, and the licence contract with royalties or
equity provides ongoing financial incentives
to better retain an inventor’s involvement.
Crama, Reyck, and Degraeve (2008) and
Dechenaux, M. C. Thursby, & Thursby (2009)
examined the effect of milestones, annual payments, royalties and upfront fees on inventor
effort. Savva and Taneri (2011) also provided
a rational explanation for the use of royalties
alongside equity payment to mitigate the inventor’s moral hazard in the UITT.
Shanghai International College of Intellectual Property, Tongji University, Shanghai 200092,
2
X. CHANG ET AL.
Another aspect of previous research on UITT is
related to the moral hazard of the firm. Hellmann
(2007) discovered that firm investment is always
insufficient or excessive in the UITT, because of
unobservable inventor effort and incomplete
license contracts. Inventor effort can be substituted with firm investment and vice versa. Thus,
as soon as one observes that the inventor is overinvesting in the UITT, the firm is always motivated to reduce its investment. Based on this,
Crama et al. (2008) adopted the principal-agent
model to investigate a firm’s development investment and found that employing different contract
terms – such as upfront fee and milestone fee –
could partially resolve the firm’s moral hazard
problem.
While the moral hazard problem of the inventor or
firm has been investigated separately, existing
research has not yet given comprehensive consideration to the moral hazard problem of both participants
in a unified economic environment. More importantly, both the inventor’s and firm’s moral hazard
are always closely related. Therefore, there is room
for further understanding of the moral hazard of the
two participants in the UITT, such as how to reduce
the moral hazard for both participants by optimizing
the license contract or how to judge whether both the
inventor and the firm have simultaneously input the
matched effort and investment.
In this paper, we regard the process of the UITT as
a university technology transfer chain (hereafter
referred to as UTTC) that involves the inventor
employed by the university, the technology transfer
office (hereafter referred to as TTO) and the firm.
The inventor creates a valuable invention and discloses it to the TTO. Then, the TTO looks for
a potential firm to buy this invention (technology
buyer), negotiates the price and identifies any further
technical investment. Then, an interested firm accepts
the invention and cooperates with the inventor to
commercialize the invention. In the UTTC, we
assume that the TTO is the principal, while the
inventor and the firm are agents. Based on the principal-agent theory, the TTO (principal) in a UTTC
has the obligation to solve the moral hazard problem,
and coordinates with the inventor and the firm (two
agents) to put in sufficient effort and investment. In
contrast to previous research, which has only focused
on the moral hazard problem of one side to maximise
the individual or organisational payoff separately, we
believe that this study provides a new research
approach from a global perspective that examines
whether the inventor and the firm put in the same
inputs and optimise the social welfare of the UITT as
well as the payoff of all stakeholders.
Further, in this paper, we consider the probability of a successful UITT to be closely related to
inventor effort and firm investment; we generate
a game model of university patent licensing in the
context of royalties and equity payment.
Moreover, we compare two significant UTTCrelated decision-making modes. In the decentralised decision-making mode (hereafter referred to
as the D-D mode), the inventor and the firm make
their input decisions independently in order to
maximise their own respective payoffs. In the centralised decision-making mode (hereafter referred
to as the C-D mode), the inventor and the firm
make their decisions together – that is, they make
their decisions simultaneously – in order to maximise the overall social welfare of the UTTC. Our
findings show that although the social welfare of
the UTTC in case of the C-D mode is significantly
larger than in that in the case of the D-D mode
due to matched inputs, the payoff of the inventor
and/or firm would become larger or lesser, which
may trigger a double moral hazard problem. In
order to resolve this issue as well as maintain the
optimization of social welfare, we first considered
the use of the portfolio contract with royalties and
revenue-sharing as the coordination method and
found that it has a few restrictions and only works
in specific scenarios. Next, we considered the
employment of a side-payment self-enforcing contract (hereafter referred to as the SSEC contract),
and the theoretical results showed that it plays an
effective role in matching inventor effort and firm
investment.
To the best of our knowledge, few studies,
empirical or theoretical, have considered the double
moral hazard from the perspective of optimising
the social welfare of the UTTC. This is an original
study that attempts to formally simulate the decision-making of all stakeholders in the process of
the UITT. The work most similar to ours is that of
Hellmann (2007), which examined the sum of all
stakeholders’ payoffs as the standard social welfare.
The author indicated that under- or overinvestment may occur in case of either the inventor
or the firm in the development stage, largely
because of incomplete licensing contracts.
However, the author did not pay more attention
to the moral hazard problem, nor did he provide
solutions for how to optimise the social welfare of
the UITT.
The remainder of this paper is organized in the
following manner: Section 2 introduces the UTTC
and model set of this study. Section 3 examines the
commonly observed licensing contract in the context
of royalties and equity payments. Section 4 discusses
the coordination effect of the portfolio contract and
the SSEC in reducing the double moral hazard problem and optimising the social welfare of the UTTC.
Section 5 presents the numerical investigations.
KNOWLEDGE MANAGEMENT RESEARCH & PRACTICE
Section 6 provides a series of model extensions, and
Section 7 concludes the paper.
2. University technology transfer chain and
model set
2.1. University technology transfer chain
In the process of the UITT, the majority of TTOs
are non-profit organizations since they are normally established by the university or created by
university employees. The TTO represents the
university administration and is considered as
the most significant intermediator between the
inventor and the firm as well as between the university and the firm. The TTO’s primary objective
is to promote the performance of the UITT (i.e.,
success rate of the UITT, social welfare etc.) by
coordinating the behaviour of all stakeholders.
Further, the TTO’s secondary objective is to maximise own economic return in order to keep the
operation running. In order to achieve these two
objectives, creating a reasonable license contract is
a tough task. In fact, most often, the TTO cannot
create an ex-ante license contract that specifies the
unobservable inventor effort and the unverifiable
firm investment, largely because the transfer of
university inventions from the inventor to the
firm is a dynamic process with double moral
hazard.
The traditional D-D mode assumes that all participants – that is, the inventor, TTO and firm – are
economically driven, choosing the extent of their
effort or investment simultaneously in order to maximise their individual payoffs separately but caring
little about the social welfare of the UITT. This is
the critical reason for the mismatch between inventor
effort and firm investment. Therefore, in the
D-D mode, it is impossible for the TTO to prejudge whether the inventor and the firm would contribute equally in terms of effort and investment, or
design a satisfactory license contract or inventor
share rate to address the double moral hazard problem. In order to address these limitations of the
D-D mode, we introduce the concept of the UTTC
in this paper, and seek to find an effective solution.
The UTTC is a process chain that consists of
the university inventor, TTO and the firm; the
firm’s involvement enables the transfer of university-invented technologies for the purpose of
furthering development and commercialisation
and linking value chains. In the UTTC, the inventor creates inventions in the academic workplace,
discloses these inventions to the university TTO,
inputs the required effort and receives a portion of
the licensing revenues (Blind, Pohlisch, & Zi,
2018; Macho-Stadler, Martínez-Giralt, & Pérez-
3
Castrillo, 1996). Note that in this paper, we
assume that the inventor discloses all inventions
to the TTO. The TTO is instrumental in developing the relationship between the inventor and the
firm and reducing their double moral hazard.
Thus, the TTO is considered an appropriate governing power in the incentive structure for coordinating the economic behaviour of both the
inventor and the firm (Brescia, Colombo, &
Landoni, 2016). The firm, which brings university
inventions to the market, invests technical funding
and pays the requisite licensing fees, as per the
specific licence contract. Based on the understanding of UTTC, in this paper, we regard all participants as a single stakeholder. This enables the
introduction of the C-D mode, which requires
the inventor and the firm to input the matched
effort and investment, regardless of the internal
profit distribution. Thus, the C-D mode could
provide a benchmark for the D-D mode from the
global perspective of UTTC.
In the social economic system, it is common
sense that the local optimum must not be greater
than the global optimum. In this paper, we consider participants’ inputs and payoffs in the
C-D mode as the benchmark. We assume that the
TTO is the inside leader of UTTC, which can
coordinate inventor effort and firm investment.
Thus, we employ two common types of coordination contracts – that is, portfolio contract and SSEC
contract – to eliminate the double moral hazard
and achieve the benchmarking effect.
2.2. Model set
In order to investigate the double moral hazard in the
process of the UITT, we develop a theoretical game
model related to UTTC, involving one inventor, one
TTO and one firm. In this paper, we assume that
both the inventor and the firm are economically
driven. In addition, we assume that the inventor
discloses all inventions to his/her universities, and
the firm always has technology demand. The primary
objective of the TTO is the optimisation of social
welfare, that is, the net economic return of UTTC,
and its secondary objective is its own payoff from the
licensing service provided.
It is widely considered that a successful UITT
requires cooperation between the inventor and the
firm, as university inventions are usually still in early
stages of development. As illustrated in Figure 1, the
success probability of the UITT is given by pðsR ; sF Þ,
where sR is the inventor effort and sF is the firm’s
technical investment. This function partially borrows
from Dechenaux et al. (2009, 2011). However, unlike
them, we consider both inventor effort and firm
investment to have a similar influence on the success
4
X. CHANG ET AL.
Figure 1. The traditional process of UITT conducted by TTO.
probability of the UITT on account of their substitutive relationship. We relax the restriction of the firm’s
fixed influence and assume that the success probability is also an exponential function related to firm
investment. The specific functional form is as given
below:
pðsR ; sF Þ ¼ 1 p0 easR bsF :
The success probability pðsR ; sF Þ is an increasing
function of both sR and sF . When sR (or sF ) is equal
to zero, the probability decreases rapidly and depends
solely on firm investment (or inventor effort).
Parameter a measures the importance of inventor
effort for a successful UITT, while b measures the
importance of firm investment. Parameter p0 can be
interpreted as a measure of the systemic risk of the
UITT. Only when p0 = 1 is pð0; 0Þ ¼ 0. That is, unless
the inventor and the firm do not invest in technology
transfer, in most cases, the success probability of the
UITT does not reduce to zero.
The TTO owns and can exclusively licence university inventions to a firm. We assume that the TTO
payoff is UT ¼ ð1 αÞR, where 1 α is the licensing
share profit that is accrued to the TTO and R is the
licensing revenue. We assume that the expected
inventor payoff is UR ¼ αR AR esR , where α is the
inventor share rate of licensing revenue, AR esR measures the inventor time-cost spent on the UITT and
AR is the influence of time-cost.
The university TTO offers the firm an exclusive
licence contract that specifies a particular type of payment. In this paper, we only consider two types of
commonly observed payments, that is, royalty fee
(per unit) and equity rate, as the means for engaging
the participation of both the inventor and the firm. We
denote the patent license contract by O ¼ ðm; rÞ or θ.
Payment term m is the upfront fee paid immediately
after the firm signs the licence contract. Payment term r
is the royalty fee (per unit), which is an ongoing licensing income. Payment term θ is the equity rate related to
production revenue resulting from patent utilization. In
this paper, the licensing revenue is closely related to the
production revenue π and product yield x. The variable
ct is the production cost per unit. The total licensing
revenue is R ¼ m þ rx (using royalty payment) or R ¼
θπ (using equity payment). Therefore, in case of
a successful UITT, the firm’s payoff is given by
UF ¼ pðπ rxÞ sF m ct x or UF ¼ pθπ sF
m ct x
In this paper, the entire process of the UITT is
described in the following manner: after receiving an
inventor’s technology disclosure (such as patent technology, know-how etc.), the TTO first searches for and
provides a specific licence contract to a potential firm. If
the firm rejects the licence contract, the bargaining
game between the TTO and the firm is over, and the
TTO continues searching for another technology buyer.
If not, the firm invests sF for further development and
pays the upfront fee m. Meanwhile, the TTO assigns
a ratio of the licensing revenue to the inventor according to the stipulations of the university’s policies.
Finally, the inventor chooses the level of effort sR
needed for the success of the UITT.
In this paper, we assume that the above process is
a sequential structure. Based on the principal-agent theory, the backward-induction method is a more effective
means to optimise faculty effort and firm investment. In
keeping with this, the sequential decision is inventor →
firm → university TTO. This allows the TTO to design
a specific contract scheme and the inventor share rate to
resolve the moral hazard problem related to faculty effort
and firm investment. In addition, in order to prove the
theoretical results, following the research by Chang et al.
(2017), we simulated participants’ payoff and social welfare under both the D-D and C-D modes based on given
contract terms (i.e., royalty fee per unit and equity payment) and the revenue distribution scheme.
3. Common licence contracts
In this section, we investigate common licence contracts based on royalties or equity payment.
Borrowing from Hellmann’s (2007) research, we
assume that the sum of participants’ payoff is the
social welfare of the UITT. First, we study inventor
effort and firm investment in the D-D mode, and
then examine the benchmark in the C-D mode.
3.1. The decentralised decision-making mode
3.1.1. Payment of royalties
In the D-D mode with payment of royalties, the firm
payoff is UFd ¼ pd ðπ rxÞ sF m ct x, the inventor payoff is URd ¼ αðpd rx þ mÞ AR esR , the
KNOWLEDGE MANAGEMENT RESEARCH & PRACTICE
university TTO payoff is UTd ¼ ð1 αÞðpd rx þ mÞ
and the social welfare is USd ðα; rÞ ¼ UFd þ
URd þ UTd . To ensure that the inventor and the firm
voluntarily participate in the UITT, we denote
0
UFd > 0, URd > αm. First, when URd ðsR Þ ¼ 0, then the
optimal inventor effort is as given below:
1
αrxapebsF
Ln
:
(1)
sRd ¼
aþ1
AR
It is evident that sRd meets the requirement
00
URd ðsRd Þ > αm. Meanwhile, URd ðsRd Þ < 0 indicates
that URd is a concave function and the maximum
payoff can be obtained at sRd . After observing the
optimal inventor effort, firm investment sFd is given
0
below, when UFd ðsFd Þ ¼ 0:
sFd ¼
a þ 1 bpðπ rxÞ a
AR
ln
þ ln
:
b
aþ1
b αrxap
(2)
00
The conditions that UFd ðsFd Þ > 0 and UFd ðsFd Þ < 0 also
suggest that sFd is the firm’s optimal investment.
Thus, according to Equation (2), we obtain the following optimal inventor effort:
sRd
ða þ 1Þαrxa
:
¼ ln
AR bðπ rxÞ
(3)
3.1.2. Equity payment
If the firm is cash constrained and/or risk averse,
equity payment is a common economical means of
licensing academic inventions. In this scenario, the
firm payoff is given by UFd ¼ ð1 θÞpd π sF ct x,
the inventor payoff is URd ¼ αθpd π AR esR , the TTO
payoff is UTd ¼ ð1 αÞθpd π and the social welfare is
USd ðα; θÞ ¼ UFd þ URd þ UTd . As in Section 3.1.1, we
0
first set URd ðsRd Þ ¼ 0, then
1
aπαθpebsF
Ln
;
(4)
sRd ¼
aþ1
AR
where sRd meets the requirements URd ðsRd Þ > 0 and
00
URd ðsRd Þ < 0. Therefore, we suggest that sRd is the
optimal inventor effort in the D-D mode with equity
payment. We consider the optimal firm investment
0
by denoting UFd ðsFd Þ ¼ 0; then, we have
sFd ¼
a þ 1 ð1 θÞbpπ a
AR
ln
þ ln;
;
b
aþ1
b αθπap
(5)
00
where UFd ðsFd Þ > 0, and UFd ðsF Þ < 0 also indicates that
the firm obtained its maximum payoff at the point
sFd . According to Equation (5), we have the following
optimal inventor effort:
sRd ¼ ln
ða þ 1Þaαθ
:
AR bð1 αθÞ
(6)
In the process of university technology transfer, the
TTO is motivated to assist both the inventor and the
5
firm to put in the matched effort and investment.
Therefore, after estimating the inventor effort and
the firm investment in the context of royalties or
equity payment, the TTO must design a patent
license contract, that is O ¼ ðm; rÞorθ, and inventor
share rate α in order to maximise the social welfare
(Objective 1) and organisational payoff (Objective 2).
Therefore, the payoff function of the TTO is given by
UTd ¼ max fI ð1 αÞðrpd x þ mÞ þ ð1 I Þð1 αÞθpd πg;
α; γ or θ
S:T:maxfUSd ðα; rÞ; USd ðα; θÞg;
sR ¼ sRd ; sF ¼ sFd ; 0 < α 1; r > 0; I ¼ 0 or 1
where I is a dummy variable indicating payment
selection. If USd ðα; rÞ USd ðα; θÞ, I ¼ 0, otherwise
I ¼ 1. This indicates that the TTO first intends to
maximise the social welfare of the UITT and then
optimise its own payoff.
Proposition 1: There exists an optimal license contract
for the TTO. When I ¼ 0, the optimal equity rate is
qffiffiffiffiffiffi
θ ¼ 1 1þa
πb , and the optimal inventor share rate is
pffiffiffiffi pffiffiffiffiffiffi
1aÞ πbþa 1þa
pffiffiffiffi pffiffiffiffiffiffi . When I ¼ 1, the optimal royalty
α ¼ ðð1þa
Þð πb 1þaÞ
pffiffi
fee (per unit) is r ¼ 1x π πb , and the optimal
1 ffiffiffiffi
. (Please refer
inventor share rate is α ¼ ð1þaÞ p
ð πb1Þ
to Appendix for details.)
In this paper, we regard the probability of
a successful UITT as being dependent on inventor
effort and firm investment. Proposition 1 shows that
there exist two single points, that is, fα ; θ g and
fα ; r g, at which they can maximise the TTO’s payoff. One implication is that the optimal equity rate is
related to the importance of inventor effort (negative)
and firm investment (positive), while the optimal
royalty fee (per unit) mainly depends on the importance of firm investment (positive) and product yield
(negative). Another significant implication is that the
TTO payoff always decreases with the inventor share
rate of licensing revenue from 0 to 1. The TTO must
not choose a specific value of inventor share rate
because of a conflict of interest.
In the D-D mode, because of the substitutional
relations between inventor effort and firm investment, the firm is always strongly motivated to reduce
its investment once it observes a high level of inventor effort. Meanwhile, the inventor also intends to
reduce their input if he/she estimates a decrease in
the firm’s investment funding. This continuous chain
reaction can easily cause the inventor and the firm to
input insufficient effort or investment, which in turn
results in a double moral hazard.
6
X. CHANG ET AL.
contract to prompt the inventor and the firm to voluntarily put in the same effort and investment.
3.2. The centralised decision-making mode:
benchmark of matched inputs
In UTTC, all participants (i.e., TTO, inventor and firm)
belong to one community of interests. This enables the
C-D mode. The TTO represents the interests of the
UTTC as a principal and conducts all agents (i.e., the
inventor and the firm) to jointly maximise social welfare
through matched inputs. Based on the principal-agent
theory, the inventor’s effort and the firm’s investment in
the C-D mode could be regarded as the benchmark. The
social welfare in the C-D mode is given by
USc ðsRc ; sFc Þ ¼ pc π AR esRc sF ct x:
(7)
It is evident that USc ðsRc ; sFc Þ is a concave function of
00
00
sRc and sFc , since USc ðsRc Þ < 0 and USc ðsFc Þ < 0. Then,
0
0
we denote USc ðsRc Þ ¼ 0 and USc ðsFc Þ ¼ 0 and obtain
the optimal inventor effort sRc and the optimal firm
investment sFc , as expressed below:
sRc ¼ ln
sFc ¼
ða þ 1Þa
;
AR b
a þ 1 bpπ
a AR
ln
þ ln
:
b
a þ 1 b apπ
4. Coordination of licence contracts
According to Proposition 3, a single royalty or equity
payment cannot optimise social welfare because of possible double moral hazard. The TTO, as the UTTC
leader, must design a scheme – that is, both the licence
contract and inventor share rate – to achieve social
welfare as shown in the C-D mode. In this section, we
attempt to employ a portfolio contract and an SSEC to
coordinate inventor effort and firm investment, respectively. Note that in case of the portfolio contract, we
only take into account royalty payment and revenue
sharing. We do not consider equity payment, since its
operation strategy is similar to that of royalty payment.
4.1. Portfolio contract
(8)
(9)
In the C-D mode, the inventor share rate and license
contract are ignored, because maximising the social welfare of the UITT is the only objective and revenue distribution is an internal issue. As shown in Equations (8)
and (9), the inventor’s effort and the firm’s investment are
not related to the payment terms and inventor share rate.
Proposition 2: The success probability of the UITT
and the social welfare in the C-D mode are greater
than those in the D-D mode.
It is indicated that, compared with the participants’
input in the C-D mode, there is a mismatch between
inventor effort and firm investment because of a double
moral hazard in the D-D mode. Proposition 2 (see
Appendix) demonstrates that the social welfare in the
C-D mode could be deemed as the benchmark, and
there is room for improvement in inventor effort and
firm investment.
Proposition 3: A single royalty or equity payment
cannot resolve the issue that drives an inventor (or
firm) to put in matched effort (or investment) in the
two decision-making modes.
The C-D mode could generate more social welfare
than the D-D mode. However, proposition 3 demonstrates that this goal cannot be achieved only through
a single royalty or equity payment, as this results in a lack
of supplementary means to redistribute the additional
profit. Therefore, there needs to be a new coordination
4.1.1. When the inventor’s effort is insufficient
In this scenario, we assume that the inventor’s effort is
less than required in the C-D mode. Thus, in order to
encourage the inventor to put in additional effort, the
TTO uses the portfolio contract that transfers a certain
part of the social welfare from the firm to the inventor
through secondary revenue distribution. It is worth noting that the TTO is excluded from this secondary revenue
distribution because it does not make any extra contribution to the additional profit (i.e., the social welfare gap
between the C-D and D-D modes). We use variable δ as
the factor of revenue redistribution. Then, under the new
D-D mode with transfer factor δ, the firm’s payoff is as
below:
UFt ðsFt Þ ¼ ð1 δÞ½pt ðπ rxÞ sFt m ct x:
The inventor payoff is as below:
URt ðsRt Þ ¼ δ½pt ðπ rxÞ sFt þ αðrpt x þ mÞ
AR esRt :
Further, the TTO payoff is UTt ¼ ð1 αÞðpt rx þ mÞ.
We also use the backwards induction method to
0
solve this game model. First, we denote URt ðsRt Þ ¼ 0;
then, we have the matched inventor effort sRt1 as below:
1
½αrx þ ðπ rxÞδapebsFt
Ln
: (10)
sRt1 ¼
aþ1
AR
In order to achieve social welfare as shown in the
C-D mode, the inventor effort and firm investment
should meet the requirements, such that sFt ¼ sFc and
sRt ¼ sRc . Then, according to Equations (8) and (10),
we obtain
δ¼
π αrx
:
π rx
(11)
KNOWLEDGE MANAGEMENT RESEARCH & PRACTICE
Lemma 1: In order to ensure that the inventor and the
firm voluntarily put in matched effort and investment,
the new D-D mode with portfolio contract must meet
the incentive compatibility constraint (ICC) as well as
the participant constraint (PC), as shown below:
(1) ICC: Inventor effort and firm investment in
the new D-D mode with portfolio contract
are equal to those in the C-D mode.
(2) PC: The inventor and the firm in the new
D-D mode with the portfolio contract both
have a higher payoff, and the total social welfare
of the UITT is equal to that in the C-D mode.
After checking the requirements of the ICC and the
PC, the results showed that the firm’s payoff in the new
D-D mode with the portfolio contract (which involves
royalty and revenue redistribution) becomes negative
because δ 1. Therefore, according to Lemma 1, in this
scenario, the portfolio contract does not meet the PC
requirement, and it cannot solve the issue of redistributing the added profit effectively or optimising the
social welfare of the UITT.
4.1.2. When the firm’s investment is insufficient
In this scenario, we assume that the firm’s investment
is insufficient. Then, the TTO uses a portfolio contract to transfer some part of the social welfare from
the inventor to the firm. In the new D-D mode with
the portfolio contract, the firm payoff is given by
UFt ¼ ð1 δÞ½αðrpt x þ mÞ AR esRt þ pt ðπ rxÞ
sFt m ct x;
The inventor payoff is given by
URt ¼ δ½αðrpt x þ mÞ AR esRt :
Further, the TTO payoff is given by UTt ¼ ð1 αÞ
ðrpt x þ mÞ.
We also order sRt ¼ sRc and sFt ¼ sFc to meet the
IIC requirement; then, we obtain
δ ¼1
ð1 þ aÞrx aπ
ð1 þ aÞαrx
αrx ¼ π rx:
(12)
(13)
In order to meet the PC requirement, compared with
the D-D mode with no coordination, we have the
following two inequalities:
URt ðsRt ; sFt Þ URd ðsRd ; sFd Þ; and UFt ðsRt ; sFt Þ
UFd ðsRd ; sFd Þ:
Then, we obtain the result that factor δ must meet the
following requirement:
7
Proposition 4: The portfolio contract with royalty
payment and revenue redistribution could influence
the inventor and the firm to put in the matched effort
and investment only when transferring adds social
welfare from the inventor to the firm. The transferring factor depends on the inventor share rate, royalty fee per unit and the importance of inventor
effort.
Assuming that the new D-D and C-D modes
achieve the same social welfare, Proposition 4 indicates a limitation of the portfolio contract with royalty payment and revenue redistribution. In order to
encourage the firm to make sufficient investment, the
portfolio contract in Section 4.1.2 is designed to
transfer the inventor payoff to the firm. More importantly, according to inequality (14), this scenario only
could occur under specific conditions.
Proposition 5: The TTO could achieve its maximum
payoff at the boundary point.
In order to ensure that the inventor and the firm
put in the matched efforts and investment, the
royalty fee per unit and inventor share rate must
Þðpd pt ÞþsFt sFd
meet the following requirement: ðπrx
αðpt rxþmÞAR esRt
ðaþ1Þrxaπ
ðaþ1Þαrx
ÞAR e
1 ααððppdt rxþm
rxþmÞAR esRt and αrx ¼ π rx.
On the other hand, because the TTO payoff is
a strictly monotonic function related to inventor
share rate and royalties, compared with the
D-D mode without coordination, in this scenario,
the TTO always obtains its maximum payoff at the
boundary point.
sRd
4.2. Side-payment self-enforcing contract
Because of the limitation of the portfolio contract
indicated in Proposition 4, in this section, the SSEC
contract is employed; the SSEC is an alternative coordination scheme to coordinate inventor effort and
firm investment from the global perspective of the
UTTC.
We denote the transferring payoff function in SSEC
contract as T ðsR ; sF Þ ¼ σesR þ ωsF þ k, where the factors σ and ω measure the value of inventor effort and
firm investment respectively, and k is a constant.
Therefore, in the new D-D mode with the royalty
payments and SSEC, the firm payoff is given by
UFt ¼ pt ðπ rxÞ sFt T ðsRt ; sFt Þ m ct x:
Further, the inventor payoff is given by
URt ¼ αðrpt x þ mÞ þ T ðsRt ; sFt Þ AR esRt :
αðpd rx þ mÞ AR esRd
ðπ rxÞðpd pt Þ þ sFt sFd
δ 1
s
Rt
αðpt rx þ mÞ AR e
αðpt rx þ mÞ AR esRt
(14)
8
X. CHANG ET AL.
The only sub-game perfect Nash equilibrium is
1φ1 φ1 φ1 φ2
;
. In this paper, we use this Nash
1φ φ
1φ φ
The TTO payoff is given by
UTt ¼ ð1 αÞðrpt x þ mÞ:
1 2
The backwards induction method is employed to
0
resolve this issue. First, we denote URt ðsRt Þ ¼ 0, and
then we obtain
1
αrxapebsFt
Ln
:
(15)
sRt2 ¼
aþ1
AR σ
The value of sRt2 meets the conditions URt ðsRt2 Þ > αm
00
and URt ðsRt2 Þ < 0; thus, the inventor can maximise
his/her payoff at point sRt2 . After observing the optimal inventor effort, the firm puts in the optimal
0
investment according to UFt ðsF Þ ¼ 0, in which case
we obtain
sFt2 ¼
a þ 1 bðpM 1 ðπ rxÞ þ σ Þ 1
ln
þ ln M; (16)
ða þ 1Þð1 þ ωÞ
b
b
where M ¼ Aαrxap
, sFt2 meets UFt ðsFt2 Þ > 0 and
R σ
00
UFt ðsFt2 Þ < 0. Then, for the given sFt2 , we can calculate
the inventor effort in the following manner:
sRt2 ¼ ln
ða þ 1Þð1 þ ωÞ
:
bðpM 1 ðπ rxÞ þ σ Þ
(17)
The SSEC scheme in the UTTC should also meet the
requirements of the ICC and the PC. Thus, according to
Equations (8), (9), (16) and (17), we denote sFt2 ¼ sFc
and sRt2 ¼ sRc ; then, the factors σ and ω are as given
below:
AR ðπ αrxÞ
:
π
(18)
aðπ αrxÞ rx
π
(19)
σ¼
ω¼
In order to determine the value of k, the payoff gap
between the inventor and the firm is considered.
Under the new D-D mode with SSEC, the additional
profit that represents the profit gap between the
D-D and C-D modes is given by,
ΔUS ¼ USc ðsRc ; sFc Þ USd ðsRd ; sFd Þ:
(20)
Meanwhile, the additional profit accrued to the
inventor and the firm is given by
ΔU R ¼U Rc ðsRc ;sFc ÞðσesRc þωsFc ÞkU Rd ðsRd ;sFd Þ and
(21)
ΔUF ¼ UFc ðsRc ; sFc Þ þ ðσesRc þ ωsFc Þ þ k UFd ðsRd ; sFd Þ: (22)
The bargaining between the inventor and the firm
can be definitely regarded as a repeated game.
Therefore, we use the traditional Rubinstein
Bargaining Game to resolve this issue of revenue
redistribution. Note that φ1 and φ2 (φ1 þ φ2 ¼ 1)
are the discount factors that measure the patience
degree of the inventor and the firm, respectively.
1 2
equilibrium rule to redistribute the additional profit.
We assume that
ΔUR ¼
1 φ1
ΔUS :
1 φ1 φ2
(23)
ΔUF ¼
φ1 φ1 φ2
ΔUS :
1 φ1 φ2
(24)
Thus, according to Equations (18)–(24), we obtain
the following value of k:
k¼
1 φ1
½UFc þ ðσesRc þ ωsFc Þ UFd 1 φ1 φ2
φ φ1 φ2
1
½URc ðσesRc þ ωsFc Þ URd : (25)
1 φ1 φ2
Then, the SSEC function is T ðsR ; sF Þ ¼ σesR þ ωsF þ k,
where the values of σ, ω and k are found in Equations
(18), (19) and (25).
When the inventor over-invests effort, in the new
D-D mode with SSEC, the inventor would be
awarded a positive additional profit by the firm
through side-payment rather than through higher
inventor share rate awarded by the TTO.
Proposition 6: In the case of the SSEC, after coordinating inventor effort and firm investment, the TTO
maximises its payoff at the point fmin α; max rg.
Similar to Proposition 5, Proposition 6 suggests
that the TTO always obtains its maximum payoff at
the boundary point, when the transferring payoff
function T ðsR ; sF Þ successfully coordinates inventor
effort and firm investment in the entire area.
5. Numerical investigation
Following the numerical simulation methods employed
by Haeussler et al. (2014), Chang et al. (2017), in order
to investigate the efficiency of the portfolio contract and
the SSEC, we employ a series of numeric cases. We
order x ¼ 100, π ¼ 500, p0 ¼ 3, m ¼ 10, ct ¼ 0:1,
a ¼ 1:5, b ¼ 0:1, AR ¼ 11 and φ1 ¼ φ2 ¼ 0:5.
Further, we use the variable α and r to control the
inventor payoff αrx and the firm payoff π rx.
As shown in Table 1, we consider cases in the
normally observed licence contract. For the royalty
payment at the given level of inventor share rate
(α ¼ 0:4), the total social welfare of the UITT is
360.12 in the D-D mode without any coordination,
which is less than 404.95 in the C-D mode (see
Proposition 2). This indicates the fact that the loss
in profit during the UITT reaches 44.83 units because
of non-matching inputs. In addition, when the TTO
increases the inventor share rate, the inventor inputs
KNOWLEDGE MANAGEMENT RESEARCH & PRACTICE
9
Table 1. Comparison of decentralized and centralized decision-making (r ¼ 3:5 or θ ¼ 0:6).
Decentralized decision-making
Variables
α
sR
sF
USC
UF
UR
UT
0.4
1.16
11.54
360.12
93.45
85.67
181.00
Royalty payment
0.6
1.56
5.46
348.71
99.54
128.50
120.67
0.8
1.85
1.14
335.52
103.86
171.33
60.33
Equity payment
0.6
0.65
14.96
327.45
124.44
113.37
89.64
0.4
0.07
21.05
293.43
103.48
68.87
121.07
more effort but the firm begins to reduce its investment rapidly, and the loss of social welfare increases
to 69.43 units. This change demonstrates the phenomenon of double moral hazard. Moreover, in
most cases, increasing inventor share rate is not an
effective means to promote the success of the UITT.
Furthermore, compared with the matched inputs
in the C-D mode, Table 1 proves that there exists
under-investment or over-investment in case of
inventor effort and firm investment in the
D-D mode (see Proposition 3). In addition, in the
C-D mode, the payoff of all participants is greater
than that in the D-D mode. This indicates that there
is room for effective contract coordination.
Based on the understanding of UTTC, Table 2
presents the improvements made by the portfolio
contract with royalties and revenue redistribution.
When the inventor share rate is 0.5 or 0.54, the
portfolio contract cannot meet the PC requirement
0.8
1.15
10.65
352.10
142.30
160.92
48.88
Centralized decision-making
0.4
0.6
0.8
1.23
22.55
404.95
99.95
99.50
168.00
236.50
205.50
137.00
68.50
because the inventor has a lower payoff (URt < URd ).
When the inventor share rate is higher than 0.54, the
portfolio contract could play an effective role in
improving social welfare. This proves that there is
a limitation in terms of coordinating inventor effort
and firm investment (see Proposition 4), since the
portfolio contract only works under certain specific
conditions (see Inequality 14).
In addition, when the value of the inventor share
rate grows from 0.5 to 0.66, the inventor’s and the
firm’s payoff increase slightly, while the TTO’s payoff
drops sharply. Another important phenomenon is that
the payoff transferred from the inventor to the firm
automatically leads to all participants putting in the
same effort and investment. Further, the transferring
factor δ is negatively related to the inventor share rate
but positively related to the royalty fee (per unit).
Table 3 presents the improvement in payoff when
the SSEC contract is employed as the coordination
Table 2. Portfolio contract with royalty and revenue sharing.
Variables
Decentralized decision making
α
0.50
0.54
0.58
0.62
0.66
r
3.33
3.25
3.16
3.09
3.01
UFd
110.11
118.26
126.02
133.42
140.47
URd
109.17
118.23
126.84
135.06
142.90
UTd
146.67
132.65
119.01
105.76
92.93
Portfolio contract with royalty and revenue sharing
USd
365.95
369.14
371.87
374.24
376.30
UFt
140.95
142.94
144.61
146.04
147.27
URt
100.67
115.54
129.88
143.69
157.00
UTt
163.33
146.48
130.47
115.22
100.69
USt
404.95
404.95
404.95
404.95
404.95
δ
0.80
0.86
0.91
0.95
0.99
Table 3. The side-payment self-enforcing contract (SSEC).
Variables
α
0.4
0.6
0.8
1
Centralized decision
r
2
3
4
2
3
4
2
3
4
2
3
4
UFc
238.66
143.46
48.26
238.66
143.26
48.26
238.66
143.46
48.26
238.66
143.26
48.26
URc
46.56
84.64
122.72
86.64
143.76
200.88
126.72
202.88
279.04
166.80
262.00
357.20
UTc
120.24
177.36
234.48
80.16
118.24
156.32
40.08
59.12
78.16
0
0
0
Decentralized decision
USc
405.46
405.46
405.46
405.46
405.46
405.46
405.46
405.46
405.46
405.46
405.46
405.46
UFd
215.67
131.07
51.74
221.34
136.75
57.41
225.37
140.78
61.44
228.50
143.90
64.56
URd
68.64
89.44
71.84
102.96
134.16
107.76
137.28
178.88
143.68
171.60
223.60
179.60
UTd
116.40
164.40
188.40
77.60
109.60
125.60
38.80
54.80
62.80
0
0
0
SSEC
USd
400.71
384.91
311.98
401.90
380.51
290.77
401.45
374.46
267.92
400.10
367.50
244.17
UFt
215.97
133.60
67.54
221.68
142.19
85.40
226.28
149.67
102.17
230.28
156.56
118.33
URt
69.25
94.50
103.44
103.63
145.04
163.74
139.10
196.67
225.13
175.18
248.91
287.13
UTt
120.24
177.36
234.48
80.16
118.24
156.32
40.08
59.12
78.16
0
0
0
T
22.69
9.85
−19.28
16.99
1.27
−37.14
12.38
−6.21
−53.91
8.38
−13.09
−70.07
10
X. CHANG ET AL.
scheme. First, in the new D-D mode with SSEC, the
inventor, firm and TTO all obtain greater payoffs than
that in the D-D mode without any coordination. The
total social welfare of the UITT is equal to that in the
C-D mode. Compared with the portfolio contract, the
SSEC works more effectively in the entire area. In
addition, when the inventor share rate increases from
0.4 to 1.0, both the inventor’s and the firm’s payoffs
increase slightly, while the TTO’s payoff declines
rapidly. Meanwhile, the transferring payoff T (from
firm to inventor) also decreases significantly with the
decrease in inventor share rate and royalty fee (per
unit). Specifically, the transferring payoff Treduces to
become negative when α and r are sufficiently large.
This implies that in certain cases, the inventor transfers part of the payoff to the firm, even though this
phenomenon is not common.
6. Discussion
6.1. Complete and incomplete contracts
As investigated in previous research (e.g., Crama et al.,
2008; Dechenaux et al., 2009), the common patent
licence contract with royalty or equity payment is an
incomplete contract, because the TTO cannot write any
contract terms that directly govern the unobservable
inventor effort and the unverifiable firm investment
before transferring the university technology. In addition, even an incomplete contract could indirectly affect
the faculty effort and firm investment, as this effect is
normally too weak with few punishments or incentives.
Thus, in the process of the UITT, it is possible for both
the inventor and the firm to reduce their inputs due to
the unreasonable revenue distribution scheme. In addition, the TTO does not have any knowledge of what the
matched inventor effort and firm investment is.
In this paper, we introduced the concept of the
UTTC, considered participants’ inputs and payoff in
the C-D mode as the benchmark and explored cases
of complete contracts. In case of the portfolio contract,
only when the inventor share rate and royalty fee (per
unit) follow a specific requirement (i.e., Inequality 14)
does the inventor put in matched effort. In case of the
SSEC contract, the transferring payoff function, which
could be positive or negative, measures the relative
contribution of the inventor effort and the firm investment to the success of the UITT. By considering the
SSEC, the inventor can obtain a positive compensatory
payment that reflects their time spent and tacit knowledge of the UITT, and this is not only limited to the
transfer of patent rights.
6.2. Two objectives of university TTO
Many studies have showed the TTO’s decisive role in
the UITT and investigated its orientation of economic
and social impact (Anderson, Daim, & Lavoie, 2007;
Caldera & Debande, 2010; Chapple, Lockett, Siegel, &
Wright, 2005; Curi, Daraio, & Llerena, 2012). For example, the TTO in Massachusetts Institute of Technology
(MIT) follows the principle of ‘Impact not Profit’. This
indicates the fact that social welfare is the primary
objective of the MIT TTO. Compared with these previous studies and actual cases, this paper considers that
the TTO’s primary objective is to maximise the social
welfare of the UITT. As shown in Tables 1 and 3, when
the inventor and the firm put in the same effort and
investment, their payoffs are not always greater than
those in the D-D mode. Thus, this does not follow the
PC requirement. It appears that the C-D mode with
given inventor share rate intensifies a double moral
hazard in certain cases, and the coordination contract
is required to redistribute the payoff of all participants.
However, the common license contract with
a single payment term cannot achieve this goal
(Proposition 3). In order to achieve the highest social
welfare (in Section 5 is 404.95), adopting the portfolio
contract or the SSEC contract is the TTO’s recommended choice. In this paper, we found that the portfolio contract has limitations because it can only resolve
the issue of revenue redistribution under certain specific
conditions (Inequality 14 and Table 2). In contrast, the
SSEC contract can coordinate inventor effort and firm
investment more effectively (Table 3).
Since many TTOs are independent from their university in the US, China and European countries, the
TTO’s second objective is to maximise its own payoff
in order to maintain normal operations. Therefore,
TTOs must ensure a reasonable inventor share rate
that distributes licensing revenue between the inventor and the TTO, and a royalty fee (per unit) that
distributes the production revenue between the university (involving the TTO and the inventor) and the
firm. In the portfolio contract, the TTO obtains its
maximum payoff at the smallest boundary point
fminfαg; rðαÞ; θðαÞg (Proposition 5). In the SSEC,
after making the transferring payoff function, the
TTO would maximise its own payoff at the point
fmin α; max rg (Proposition 6).
It is worth noting that although the TTO’s payoff
is secondary, it cannot be neglected. In US universities, TTO’s intermediary service fee must be paid
first. For example, The Office of Technology
Licensing (OTL) in Stanford University usually first
deducts its cost from royalties or takes 15% equity to
support its own running, and reimburses any direct
expenses. In contrast, Chinese universities pay little
attention to TTO payoff, and there is a particular lack
of permanent and effective incentive mechanisms for
TTO staff. According to Article 44 of ‘Law of the P.R.
C on Promoting the Transformation of Scientific and
Technological Achievements’, no less than 50% of net
licensing revenue obtained from the UITT should be
KNOWLEDGE MANAGEMENT RESEARCH & PRACTICE
awarded to persons who made important contributions to scientific and technological achievement and
its transformation. However, there are no official
rules regarding how much licensing revenue should
be awarded to the TTO and its staff. In practice, the
actual inventor share rate generally increases to 70%
(e.g., Shanghai, Nanjing and other Chinese cities) or
even 90% (e.g., Hubei province in central China). Our
finding in Table 1 shows that it does not always work
when the TTO promotes inventor’s participation by
giving up its own payoff and unilaterally transferring
it to the inventor.
6.3. Portfolio contract vs. side-payment
self-enforcing contract
In this paper, it becomes evident that there are three
differences between the portfolio and SSEC contracts.
First, the portfolio contract can only coordinate the
inventor effort and the firm investment with
a limitation of transfer factor, while the SSEC contract works more effectively with fewer restrictions.
In addition, the portfolio contract mainly focuses on
the transfer factor (redistribution proportion) and
redistributes the additional profit in the final stage
of the UITT, depending on the product yield.
However, the product yield is uncertain; therefore, it
is difficult for the TTO to make an accurate revenue
sharing contract.
In the case of the SSEC contract, the transferring
payoff function depends on the inventor effort and
firm investment, which could be evaluated and
recorded by the TTO during the execution of the contract. For example, The TTO can design a scheme in
which the inventor gets his/her reward according to the
time spent, and requires the firm to put in sufficient
R&D funding and infrastructure support through the
“Maximum Effort Clause” stated in the licensing contract. Therefore, according to the SSEC contract, the
TTO can easily write an ex-ante contract term that
specifies the inventor’s time spent and related labour
remuneration. Lastly, the SSEC contract considers the
extent of participants’ patience, which reflects their
negotiation power expressed through the factors of the
Rubinstein Bargaining Game. To conclude, we believe
that the SSEC contract is a better coordination method
for optimising the social welfare of the UITT and the
payoff of all stakeholders.
7. Conclusion
A successful university technology transfer mainly
depends on inventor effort and firm investment.
This process is fraught with incentive problems, largely because of the double moral hazard problem. In
this paper, we introduced the concept of the UTTC
and used the portfolio contract and the SSEC contract
11
to coordinate the inputs of all stakeholders and maximise the social welfare of the UITT.
We assumed that in UTTC, the TTO is the principal and both the inventor and the firm are agents,
and attempted to determine the maximum social
welfare. This makes our research fundamentally different from previous studies because it (1) investigates whether the inventor and the firm have put in
matched effort and investment, based on the benchmark created by the C-D mode; and (2) preliminarily
discusses how to coordinate inventor effort and firm
investment through the coordination of contracts,
clearly demonstrating that inventor effort and firm
investment in the traditional D-D mode normally do
not match and that there is room for improvement.
From the perspective of optimising the social welfare
of the UITT, we found that the common license
contract with single royalties or equity payment
does not work effectively. Further, the portfolio contract only plays a limited role under specific conditions, and the SSEC contract is effective at
coordinating participants’ inputs. Our numerical
investigation successfully proved these results.
In contrast to prior studies that only focused on
individual or organisational payoff in the UITT process,
this study paid more attention to social welfare. The
double moral hazard is regarded as the most significant
inherent problem that is not conducive to optimising
social welfare from the perspective of UTTC. Our analysis added to the understanding of how to eliminate
double moral hazard through the coordination of contracts. The new D-D mode with portfolio contract or
SSEC contract can enable matched inputs in terms of
inventor effort and firm investment.
Like many previous studies, this paper has certain
limitations. First, our theoretical assumption ignores
certain scenarios. For example, this paper does not
consider the fact that an inventor may decide not to
disclose inventions to the TTO (Halilem, Amara,
Olmos-Peñuela, & Mohiuddin, 2017). We found that
this phenomenon is common in Chinese universities
(Fong, Chang, & Chen, 2018). Further research must
pay attention to this phenomenon, especial when the
TTO is managed by both university and firm. Second,
data is a common limitation. Our empirical analysis
mainly depends on numerical simulation. We were
unable to collect actual data or cases concerning inventor effort and firm investment. In further research, we
will aim to develop a more comprehensive theoretical
model to optimise the UITT process and perhaps allow
the inventor and the firm to select their preferred UITT
commercialisation models.
Disclosure statement
No potential conflict of interest was reported by the
authors.
12
X. CHANG ET AL.
Funding
This work was supported by National Natural Science
Foundation of China [71603184], and National Key R&D
Program of China [2017YFB1401102].
References
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KNOWLEDGE MANAGEMENT RESEARCH & PRACTICE
13
Appendix
List of Abbreviations
Abbreviations
UITT
UTTC
TTO
D-D mode
C-D mode
SSEC
Description
University-industry technology transfer
University technology transfer chain
Technology transfer office
Decentralisation decision-making mode
Centralisation decision-making mode
side-payment self-enforcing contract
List of variables
Variables
UT
UTd , UTt ,
UTc
UF
UFd , UFt ,
UFc
UR
URd , URt ,
URc
USd
USc
pd , pt , pc
sR
sRd , sRt , sRc
sF
sFd , sFt , sFc
p
a
b
p0
AR
R
m
r
θ
I
π
x
ct
α
δ
T
σ
ω
k
ΔUS
ΔUR
ΔUF
φ1 and φ2
Description
The TTO payoff
The TTO payoff in D-D mode without any coordination, in new D-D mode with coordination
contract, and in C-D mode, respectively
The firm payoff
The firm payoff in D-D mode without any coordination, in new D-D mode with coordination
contract, and in C-D mode, respectively
The inventor payoff
The inventor payoff in D-D mode without any coordination, in new D-D mode with coordination
contract, and in C-D mode, respectively
The social welfare of UITT that is the sum of participants’ payoff in D-D mode
The social welfare of UITT that is the sum of participants’ payoff in C-D mode
The success probability of UITT in D-D mode without any coordination, in new D-D mode with
coordination contract, and in C-D mode, respectively
The inventor effort putting in UITT
The inventor effort in D-D mode without any coordination, in new D-D mode with coordination
contract, and in C-D mode, respectively
The firm investment in UITT
The firm investment in D-D mode without any coordination, in new D-D mode with coordination
contract, and in C-D mode, respectively
The success probability of UITT
Measure the importance of the inventor effort to successful UITT
Measure the importance of the firm investment to successful UITT
the systemic risk of UITT
Measure the influence of time-cost
The total licensing revenue
The upfront fee paid by firm when royalty payment is used
The royalty fee per unit
The equity rate related to production revenue resulting from patent utilization
The dummy variable indicating payment selection
The production revenue resulting from technology licensing
The production yield
The production cost per unit
The inventor share rate
The transfer factor when portfolio contract is used
The transferring payoff function when SSEC is used
Measure the value of inventor effort
Measure the value of firm investment
A constant when the transferring payoff function is used
The profit gap between D-D mode and C-D mode
The added profit which accrued to inventor when SSEC is used
The added profit which accrued to firm when SSEC is used
The discount factors measuring the patience degree
Proof of Proposition 1
Table A1 shows the optimal inventor effort, the optimal
firm investment, and the related probability of successful
UITT in the traditional D-D mode and C-D mode with the
single royalty and equity payment.
14
X. CHANG ET AL.
Table A1. Activities of faculty and firm in decentralized and centralized decision
making.
Faculty’s effort
Decentralized decision
making with royalties
Decentralized decision
making with equity
Centralized decision
making
sRd ¼
Þaαrxd
ln Að1þa
R bðπrxd Þ
Firm’s technology investment
sFd ¼
bpðπrxd Þ
aþ1
b ln aþ1
þ
AR
a
b ln αrxd ap
Success rate
pd ¼ 1 bð1þa
πrx Þ
Þaαθ
sRd ¼ ln ðA1þa
R bð1θÞ
ð1θÞbpπ
AR
a
sFd ¼ aþ1
b ln aþ1 þ b ln αθπap
pd ¼ 1 πb1þa
ð1θÞ
Þa
sRc ¼ ln ðaþ1
AR b
bpπ
AR
a
sFc ¼ aþ1
b ln aþ1 þ b ln apπ
pc ¼ 1 1þa
πb
When USd ðα; rÞ > USd ðα; θÞ, the royalty payment is used
in the license contract. Then, for the given level of inventor
0
effort and firm investment, we first denote USd ðαÞ ¼ 0, and
0
have ð1 þ aÞαrx ¼ π rx. Next, we denote UTd ðrÞ ¼ 0,
and obtain the optimal royalty fee (per unit) r ¼
pπffiffi
1
and the optimal inventor share rate
x π
b
1
α ¼ ð1þaÞ pffiffiffiffi
.
ð πb1Þ
Similarly, when USd ðα; rÞ USd ðα; θÞ, we denote
0
0
USd ðαÞ ¼ 0 and UTd ðθÞ ¼ 0, then obtain the optimal equity
qffiffiffiffiffiffi
rate θ ¼ 1 1þa
πb and optimal inventor share rate
pffiffiffiffi pffiffiffiffiffiffi
1aÞ πbþa 1þa
pffiffiffiffi pffiffiffiffiffiffi .
α ¼ ðð1þa
Þð πb 1þaÞ
Proof of Propositions 2 and 3
For Proposition 2, as shown in Table 4, it is clear that
pc > pd ðθÞ and pc > pd ðαÞ. The comparison between USd
and USc also shows that USc USd ðα; rÞ and
USc USd ðα; θÞ.
In order to maximize the total social welfare, in this
paper we consider the inputs required in C-D mode as
the benchmark, which enables us to make the following
comparison:
sRc sRd ¼ ln
sFc
π rx
1θ
or ln
αrx
αθ
sFd
a b1
αrx ab π 1b
αθ b
1
¼ ln
or ln
π rx π rx
1θ
1θ
Thus, if αrx π rx or αθ 1 θ, we have sRc sRd and
sFc sFd , otherwise the opposite trend occurs, particularly
if αrx ¼ π rx or αθ ¼ 1 θ, sRc ¼ sRd but sFc > sFd .
For Proposition 3, the result shows that the common
license contract with single royalties or equity payments
cannot make the sRc ¼ sRd and sFc ¼ sFd at the same time.
This suggests that the common patent license contract with
single royalty or equity payment cannot ensure matched
effort and investment from inventor and firm as in
C-D mode.