This thesis attempts to analyze the incentive compatible (IC) region for the royalty contract in an innovation context. It also describes the... Show moreThis thesis attempts to analyze the incentive compatible (IC) region for the royalty contract in an innovation context. It also describes the contracts that induce the licensee and the patentee to obtain the maximum pro t when using this licensing contract. We analyze the IC region for cost-reducing innovations " and royalty ratios in two situations: the non-drastic innovation and the drastic innovation. We also nd when licensing occurs, there is an e ciency loss. However, the IC region can limit the e ciency loss. Then, we extend our results to a two-stage game in order to check whether the royalty contract is still a good contract for both the licensee and the patentee from a pro t perspective. In stage two, when the size of innovation is smaller than the size of innovation in stage one, royalty contracts are inferior to other contracts. However, when the size of innovation in stage two is greater than that in stage one, the royalty contract is an improvement over other contracts. PH.D in Management Science, May 2014 Show less