Quality and Beliefs in the Market for University Inventions A model of bargaining with Private Information

Abstract

The paper analyzes the efficiency implications for the licensing process of university inventions when firms can use the secrecy device. Secrecy is a confidential agreement used by the firms to learn about the quality of inventions prior to licensing. I use a bargaining model with one-side private information to analyze the extent to which the secrecy device improves the efficiency of the licensing process.

The decision to enter a secrecy agreement is determined by the uncertainty about the underlying quality of inventions. The bargaining model assumes that the university/inventor has private information about the value of invention and that firms use secrecies as costly device to guarantee the quality of the invention.

The main results show that the secrecy device increases the efficiency of the licensing process and that the gains in efficiency are proportional with the difference between the established firm’s cost of production and the inventor’s cost of production.

Keywords: bargaining, asymmetric information, private information, adverse selection, Bayesian updating