Licensing and Technology Transfer

Government mandated technology transfers from the developer of a product to a second source offer a potential gain of reduced information rents and procurement costs, even when such transfers are otherwise inefficient. This paper models the tradeoff between information extraction and inefficient transfers in the context of an optimally-designed procurement auction in which an incumbent supplier bids against a potential second-source firm. In the optimal auction, the incumbent firm is given stronger incentives to bid aggressively by transferring technology when the bids from the competing firms are close and the transfer is not otherwise too inefficient