DOI 10.1007/s10657-006-6646-1 Efficient compensation for employees ’ inventions∗

Abstract We analyze a legal reform concerning employees ’ inventions in Germany. Using a simple principal-agent model, we derive a unique efficient payment scheme: a bonus which is contingent on the project value. We demonstrate that the old German law creates ineffi-cient incentives even if litigation cost is zero. However, the new law (concerning university employees) and the pending reform proposal (concerning other employees) also fail to im-plement first-best incentives. With suboptimal incentives to spend effort on inventions, the government’s goal, an increase in the number of patents, is likely to be missed