Contracting in the Self-reporting Economy
by Romana L. Autrey & Richard Sansing
EXECUTIVE SUMMARY — Intellectual property can be
used by its ownerdirectly, licensed to
a third party for a fixed royalty, or licensed to a third party for a
variable royalty. The variable royalty arrangement depends on self-reporting by
the licensee, which in turn induces demand for auditing by the licensor. This
research studies a setting with the following features: a production cost
advantage on the part of the outside party that creates gains from licensing; a
limited liability constraint that prevents the licensee from owing more
royalties than the gross profits of licensing the intellectual property and prevents
the licensor from capturing all of the economic surplus via a fixed royalty
agreement; and accounting and auditing costs that reduce the
benefits of a variable royalty agreement. Key concepts include:
·
The owner of intellectual property will enter into a variable royalty
agreement with an outside party if—and only if—the accounting and auditing
costs are sufficiently low.
·
With higher cost levels, the owner will use the property directly if the
owner can do so profitably. Otherwise, the owner will prefer to license the
property in exchange for a fixed royalty.
·
The expected aggregate accounting system and audit costs are
minimized when the licensor can compel the licensee to bear the audit costs in
case underreporting is detected.
·
Internal control provisions within the Sarbanes-Oxley Act make variable
royalty arrangements based on self-reporting and auditing relatively
more attractive than such arrangements prior to Sarbanes-Oxley. Sarbanes-Oxley
effectively lowers the licensor's audit costs even though the licensor must
audit all low reports, because auditing all low reports deters the
licensee from underreporting in the first place.
Sumber: http://hbswk.hbs.edu/Pages/browse.aspx?HBSIndustry=Accounting&HBSTopic=Accounting&HBSTopic=Economics
