Control Rights over Intellectual Property: Corporate Venturing and Bankruptcy Regimes1

We develop a theory of control rights in the context of licensing interim innovative knowledge for further development, which is consistent with the inalienability of initial innovator’s intellectual property rights (IPR). Control rights of a downstream development unit, a buyer of the interim innovation, arise from his ability to prevent the upstream research unit from forming …nancial coalitions at the ex interim stage of bargaining, over the amount and structure of licensing fees as well as the mode of licensing, either based on trade secrets or via patenting. We model explicitly the equilibrium choice of the …nancial structure of licensing fees and show that the innovator’s …nancial constraint is more likely to bind when the value of her innovation is low. By constraining the ‡exibility of the upstream unit regarding her choice of the mode of licensing of her interim knowledge, the controlling development unit is able to reduce the research unit’s payo¤s in such contingencies. This incentivises the research unit to expend costly e¤ort ex ante to generate more productive interim innovations. We show that such interim control rights can be renegotiation-proof. JEL Codes: D23, K12, O32.