Licensing Price and Indemnification Clauses on Intellectual Property Rights : An Empirical Investigation of Double Side Moral Hazard

This study examines the role of indemnification clauses on intellectual property (IP) rights in the case of licensing deals. We propose that indemnification clauses on intellectual property rights operate as signals to share the risk and reduce moral hazard in licensing contracts. Building on market for technology literature and contract theory, we suggest that the inclusion of IP indemnification clauses in technology licensing explains the prevalence of payment schemes based on a combination of lump sum and royalty rate. Furthermore, the effect is amplified when the licensee and licensor operate in distant technological domains. Predictions are tested on data from the pharmaceutical industry and we discuss implications for the optimal design of licensing contracts