Contracting for tacit knowledge: The provision of technical services in technology licensing contracts

Recent research on the economic payoff from new technology has emphasized the importance of tacit knowledge or know-how. This paper shows that arm's length contract can overcome the problems in contracting for know-how by bundling complementary inputs with know-how in a technology package, and leveraging the superior enforceability of contracts over the latter. In the empirical part of this paper, the relationship between bundling and transfer of know-how is analyzed, using Indian data. The results imply that tied sales of inputs may increase the efficiency of contracts involving the transfer of know-how. A striking result, in the context of the current North-South debates on intellectual property rights, is the packaging of patents with know-how.