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

This article 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 grant-back clauses may adversely affect competition because they reduce the licensee's incentive to engage in R&D and thereby limit rivalry in innovation markets