Sequential Innovation and the Duration of Technology Licensing

We model an innovators choice of payment scheme and duration as a joint deci-sion in a multi-period licensing game with potential sequential innovations and some irreversibility of technology transfer. We \u85nd that it may be optimal to license the innovation for less than the full length of the patent and that royalty contracts can be used to overcome a time-consistency problem faced by the innovator. Our results suggest that licensing contracts based on royalty have a longer duration than \u85xed-fee licenses and are more likely to be used in industries where sequential innovations are frequent. (JEL D21, D40, L13