Managing Licensing in a Market for Technology

Technology licensing is an important means for companies to extract more value from their intellectual assets. We build a model that helps understand how licensing activity should be organized within large corporations. More specifically, we compare decentralization–where the business unit using the technology makes licensing decisions–to centralized licensing. The business unit has superior information about licensing opportunities but may not have the appropriate incentives because its rewards depend on product market performance. If licensing is decentralized, the business unit forgoes valuable licensing opportunities because the rewards for licensing are (optimally) weaker than those for product market profits. This distortion is stronger when production‐based incentives, especially private benefits, of business unit managers are more powerful, making centralization more attractive. Surprisingly, we find that interdependency across business units may result in more, not less, decentralization. Furthermore, even though centralization results in less information, centralized licensing deals are larger. Our model conforms to the existing evidence that reports heterogeneity across firms in both licensing propensity and organization of licensing.