Licensing and Innovation with Imperfect Contract Enforcement∗

Licensing promotes technology transfer and innovation, but enforcement of licensing contracts is often imperfect. We explore the implications of weak enforcement of con-tractual commitments on the licensing conduct of firms and market performance. An upstream firm develops a technology that it can license to downstream firms using a fixed fee and a per-unit royalty. Strictly positive per-unit royalties maximize the licensor’s profit if competition among licensees limits joint profits. Although imperfect contract enforce-ment lowers the profits of the upstream firm, weak enforcement lowers prices, increases downstream innovation, and in some circumstances can increase total economic welfare