Contract Structure and Performance of University-Industry Technology Transfer Agreements

I examine the relationship between the payment structure of contracts and the likelihood of termination using a sample of patented technologies licensed by Harvard University to for-profit enterprises. For early stage technologies such as these, non-contractible effort and investment is typically required from both inventor and licensing firm to bring the technology to market. In this double-sided moral hazard setting, the payment structure stipulated in the contract affects the incentives of firms to invest in and of inventors to provide on-going support for the development of the technology. The analysis shows that for large licensees, the use of (larger) contingent payment terms is associated with lower hazard rates of termination, whereas for small licensees the positive and negative incentives generated by contingent payments cancel each other out. The difference in the impact of incentives between small and large firms is consistent with the literature that suggests that agency problems may be less severe in small firms. An instrumental variables approach is used to account for potentially endogenous relationship between contract structure and performance