Efficient Compensation for Employees' Inventions

In Germany, employers can claim the right to any invention made by their employees, but have to pay a compensation if they do so. Recently this compensation was made subject to a legal reform proposal (and a new law concerning university employees). We set up a simple Principal-Agent model to analyze the current and the new compensation schemes. Our model allows to derive a unique efficient payment scheme that consists of a contingent fixed payment only. We show that freedom to negotiate over the compensation after the invention provides inefficient incentives. Efficiency requires the compensation to be fixed ex-ante, as it is provided by both the proposed law (concerning employees in general) and the new law (concerning university scholars). However, both set the payment schemes in an inefficient way. With suboptimal incentives to spend effort into inventions, the government's goal, an increase in the number of patents, is likely to be missed