License to be more innovative

A patent holder may choose to give up its current leading position through patent licensing in order to increase its incentive to innovate further and thus avoid falling behind its rivals in future RandD races. We show that because of this “catching-up” effect, licensing may occur even when it reduces current industry profits. The overall effect of licensing is to slow down the pace of innovation, as it reduces the licensee's incentive to conduct RandD.