A Dynamic Analysis of Licensing: The ‘‘Boomerang'’ Effect and Grant‐Back Clauses*

Abstract

This article develops an incomplete contract model of the licensing relationship to analyze thedynamiceffects of licensing on R&D competition in theinnovationmarket 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.

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