205
The Governance of Contracts: Empirical Evidence
on Technology Licensing Agreements
by
ERIC BROUSSEAU, RÉGIS COEURDEROY, AND CAMILLE CHASERANT∗
This paper provides new evidence on the contractual governance of technology
licensing agreements. Using an international sample of licensing contracts, we ex-
plore how contracts are designed to deal with specific contractual risks. In particu-
lar, we comparatively assess the influences of transaction attributes, institutional
frameworks, and strategic considerations on the creation of licenses. Empirical
results reveal that contractual clauses for governance are crafted independently.
This leads to a discussion of complementarities between contractual components,
which are frequently assumed in theory. Furthermore, our results are certainly
amongst the first to provide econometric evidence on the pervasive influence of
private institutions on the trading of technology. (JEL: L 14, L 24, O 34)
1 Introduction
As pointed out by many authors (e.g., CAVES, CROOKEL, AND KILLING [1983];
BESSY AND BROUSSEAU [1998]; ANAND AND KHANNA [2000]; ARORA AND
FOSFURI [2002], [2003]), knowledge transfer between firms is a complex procedure
and subject to many hazards. The licensor (henceforth referred to as he) has little
or no ex post control over how the intangible assets transferred to the licensee (she)
are used, while the latter can use what she has learnt to compete against her former
partner. These hazards increase transaction costs and hinder the development of
technology transfers, both major concerns for innovators and policy-makers alike.
The fact that patent owners miss opportunities to reap maximum revenue from their
inventions will ultimately decrease collective welfare, viz., poor distribution of in-
∗ This paper is based on a survey carried out among the members of the Licens-
ing Executive Society, International (LESI). This survey was backed by the LESI and
LES-USA-Canada. LES France also actively participated in the research. The authors
of this paper would like to thank LESI members and executives their support. We are
grateful for the useful comments made by participants of the survey and at various
seminars. We are also highly grateful for the helpful suggestions made by the refer-
ees of this journal. We would like to thank Christian Bessy (CNRS, CEE), who helped
us with the survey and data, and Jean-François Sattin (ATOM & UTC) and Ste´phane
Saussier (ATOM & U. of Paris XI) for their constructive comments. The usual caveats
apply.
Journal of Institutional and Theoretical Economics
JITE 163 (2007), 205–235 © 2007 Mohr Siebeck – ISSN 0932-4569

Eric Brousseau, Régis Coeurderoy, and Camille Chaserant206 JITE 163
ventions and poor rewards for innovators will decrease incentives and capabilities
for innovators to create. In this context, it is vital to understand how firms can es-
tablish efficient contracts to deal with transactional hazards. It is also important to
analyze how more efficient institutional frameworks could be designed to decrease
the cost of trading intangible goods to allow for the emergence of “markets for
technologies” to maximize distribution (ARORA, FOSFURI, AND GAMBARDELLA
[2001]).
A better understanding of contractual practices in the field of technology trans-
fer will boost progress, both in the specifics of knowledge transfers (which are
explored in the literature on technology alliances, e.g., OXLEY AND SILVERMAN
[2007]; on technology licensing, e.g., BESSY AND BROUSSEAU [1998], ARORA,
FOSFURI, AND GAMBARDELLA [2001]; and on optimal intellectual property right
(IPR) regimes, e.g., GALLINI AND SCOTCHMER [2002], JAFFE AND LERNER [2004],
SCOTCHMER [2004]) and in the wider field of contractual design. Indeed, studies
on the creation of contractual mechanisms and how to combine them in a contract
are still emerging. Existing literature can be divided into two broad areas. The first
focuses on an in-depth analysis of contractual components – especially incentive
schemes and retaliation mechanisms – that are analyzed (either theoretically or
empirically) independently of other features of the contracts. The second area – par-
ticularly the transaction-costs (e.g., WILLIAMSON [1985]) and incomplete-contract
perspectives (e.g., GROSSMAN AND HART [1986], HART AND MOORE [1988]) –
contrasts contractual logics (e.g., market versus hybrid versus hierarchy, or trans-
actional versus relational contracting). These two streams of literature ultimately
relate to contrasting analytical traditions, and because studies on potential interac-
tion between contractual provisions are underdeveloped, it is difficult to reconcile
the two streams. By considering the relationships between provisions organizing
governance, this paper contributes to that field of study.
This paper is an applied contribution to both the study of contractual design and
that of technology transfer. The aforementioned literature on technology licensing
agreements (TLAs) reveals that such agreements are usually established in the
long run in uncertain contexts. This is due to the fact that technological changes
may occur and that complex strategic games may be played around the technology
(e.g., GALLINI AND WINTER [1985], SHEPARD [1987], JORDE AND TEECE [1990],
KAMIEN [1992]) and around the alliances (e.g., OXLEY AND SILVERMAN [2007]).
This situation results in contracting parties implementing sophisticated governance
mechanisms to adjust their mutual commitments during the lifetime of the contract.
We focus on supervision, renegotiation, and dispute resolution mechanisms, both
on an individual and on a combined basis. Findings are based on a database of
213 licensing contracts. Data has been collected from a survey of 160 American,
Japanese, and European firms, working mainly in chemical, equipment, and service
industries (see BROUSSEAU, CHASERANT, AND BESSY [2005]; BROUSSEAU et al.
[2005]).
We first develop our analytical framework (section 2), then present the data and
research design (section 3), before finally discussing the results (section 4). We