1997 Reports

A Dynamic Analysis of Licensing: The "Boomerang" Effect and Grant-Back Clauses

Choi, Jay Pil

This paper develops an incomplete contract model of the licensing relationship to analyze the dynamic effects of licensing on R&D competition in the innovation market and to examine the rationale for often observed grant-back clauses. Of particular concern are how the consideration of future competition distorts the licensing relationship and how the "grant-back" clause can mitigate this distortion. I also evaluate the validity of the casual antitrust argument that grantback clauses may adversely affect competition because they reduce the licensee's incentive to engage in R&D and thereby limit rivalry in innovation markets.