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J. Service Science & Management, 2010, 3 : 78 -83 doi:10.4236/jssm.2010.31009 Published Online March 2010 (http://www.SciRP.org/journal/jssm) Copyright © 2010 SciRes JSSM Design on the Incentive Contract of University Achievements Commercialization Offices Based on Principal-Agent Theory Meifang Li1, Yongxiang Zhao2, Feng Shi3 1School of Management, Wuhan University of Technology, Wuhan, China; 2Wuhan University of Technology, School of Computer Science and Technology, Wuhan, China; 3Wuhan Academy of Social Sciences, Wuhan, China. Email: poplimeif@126.com, zhaosanhe@263.net, sf196293@163.com Received October 13th, 2009; revised November 21st, 2009; accepted December 30th, 2009. ABSTRACT Based on principal-agent theory, an incentive contract model of university achievements commercialization offices (UACO) was constructed in this paper, and an optimal incentive contract between university and UACO was re- searched into. The conclusion indicates that many factors, such as working ability, working willingness, risk aversion degree of UACO, as well as the outside uncertain factors and so on, have important influences on the contract design. The efficiency of commercialization of university inventions has a squared forward growth relation with working ability, a direct proportion with working willingness, and has an inverse proportion with risk aversion degree of UACO and with outside uncertainty. Additionally, the level of hard working of UACO under the condition of information asymme- try is strictly less than that of information symmetry. Keywords: University Achievements Commercialization Offices (UACO), Achievements Commercialization, Principal-agent, Incentive Contract 1. Introduction In order to promote the commercialization of research findings, and to raise technology transfer rate, almost all the universities in China have set up a department for connecting among industry, university and research in- stitute. The department usually conducts the work of pa- tents applications and achievements transformation for teachers and scientists of the university. At present, there is still not uniform name for this department in Chinese universities, some of them is called university industry management office, some is named S&T achievements transfer office, and still others is known as technology transfer office and so on. In this paper it is named uni- versity achievements commercialization office (UACO) for the sake of convenience. In the recent years, the transformation of achievements of universities has been attached great importance in all levels of the governments in China, and universities also offers a series of incentives for the commercialization of research findings. However, the result of transformation is still not desirable. The reasons would be various but UACO has to bear the blame, because it plays an impor- tant role of bridge and link between university and busi- nesses. But the cause from UACO hasn’t been given enough attention. At the present time there is less re- search focusing on this problem domestically, and the research has been existed abroad but numerically small. For example, it is fully affirmed the important roles of UACO in the papers of Leitch, et al [1] and Colm, et al [2]. They hold that UACO should and could play an im- portant and unique role in the process of the commer- cialization of university achievements. Donald, et al [3] and Swamidass, et al [4] proposed that inappropriate administrative staff and irrational reward system are the major hindrances to the achievements transformation of university. Chapple et al. pointed out that it is very im- portant for university technology transfer officers and managers in England to upgrade business skills and ca- pabilities in order to increase university technology transfer efficiently [5]. Markman et al. showed that commercialization outcomes would be enhanced when UACO employ diverse licensing strategies, enjoy greater autonomy, and be compensated well [6]. In fact, there is a principal-agent relationship between university and UACO, and commercialization efficiency could be en- Design on the Incentive Contract of University Achievements Commercialization Offices Based on Principal-Agent Theory Copyright © 2010 SciRes JSSM 79 hanced through the design of incentive contract of these two parts, but scholars in China and abroad pay little attention to it. In this paper, principal-agent theory is deployed to construct a principal-agent model between university and UACO, so as to design an incentive con- tract thereby increasing the efficiency of commercializa- tion, and hardening society-serving function of universi- ties. 2. The Principal-Agent Relations of University Ac hie ve me nt s Commercialization and the Necessity of Incentive Contract Designing 2.1 The Principal-Agent Relations of University Achievements Commercialization Any interrelation involving asymmetric information could be called principal-agent relation from the sense of eco- nomics. One party with information superiority is agent, and the other at information disadvantage is principal. Furthermore, personal information of agent has some influence on the interests of principal who is uninitiated [7]. From the perspective that UACO is commissioned to commercialize achievements and patents of university scientists, there is a principal-agent relation between university and UACO. In case of information asymmetry, UACO has private information, and this information such as how hard it works, has a great impact on the in- terests of university, for example impacting on the com- mercialization efficiency of the university. According to the theory of information economics, in- formation asymmetry is easy to result in moral hazard problem. In the principal-agent relation between univer- sity and UACO, university (as principal) were not acces- sible to direct observation on which level of hard work- ing UACO had selected, and what university could ob- serve was another variables, such as technology transfer rate and so on. But the rate of technology transfer is de- termined by the level of hardworking and other outside random factors together. Consequently, there is an in- complete information game with uncertainty but couldn’t be supervisory [8]. In this game, the task confronting university (principal) is how to design an incentive con- tract to motivate UACO (agent) select behavior that fit for the interests of the university. 2.2 The Necessity of Incentive Contract Designing To some extent, UACO performs practically no function in the universities in China, and it is lack of influence and ability in the work of technology transfer. Many university scientists are reluctant to commercialize their achievements through UACO, but to establish commu- nication with corporations by themselves or just declare their achievements for prize and acknowledgment and then put them on the shelf. There are many causes giving rise to this situation. First, staff structure is unfit for requirements of commer- cialization. The officers in UACO have, in many cases, neither technical advantages nor marketing skills, and have not the competence to be engaged in the work of achievements commercialization. Second, the compensa- tion system is not rational. What UACO basically exe- cutes is fixed salary in China for a long time, and there is no difference for officers between good business and bad one, no difference between hardworking and slacking. As a result, there is no enthusiasm for officers of UACO to involve in the work of commercialization. Third, it lacks the necessary autonomy in UACO. A great majority of UACO in China are attached to departments of Science & Technology of universities. Officers work in UACO just as a matter of routine, and it is absence of mental stress for their jobs. Fourth, it is lack of active action of hunting for market demands. The outdated way of work- ing that doing nothing but waiting for buyer cannot meet the needs of a market economy. Consequently, in order to make UACO play a greater role for universities in serving local economy and in pressing ahead with combination of industry and univer- sity, the urgent task is to introduce market mechanism into UACO, to reform the existing compensation system and grant more autonomy, and to enhance enthusiasm for the work of commercialization. Under these circumst- ances, it is urgently necessary for universities to design an optimal contract, so as to encourage UACO to work doubly hard on enhancing the efficiency of commer- cialization of research findings in universities. 3. Design on Incentive Contract of University Achievements Commercialization Offices On the basis of the preceding analysis on the principal- agent relation between university and UACO, and sup- posing that principal and agent are based on ra- tional-economic man hypothesis, whether agent choose to work hard to enhance the efficiency of achievements transformation or not is totally dependent upon the in- centive contract that university provided. According to the parameter method of distribution function brought forward by Mirrlees [9] and Holmstrom [10], the princi- pal-agent model between univ ersity and UACO could be constructed. 3.1 Construction of Incentive Model for UACO For the convenience of research working, and in a situa- tion of no influence on conclusion, the following as- sumptions are proposed, supposing e is a one-dimen- sion variable of hardw orking level of agen t (UACO), and it is related to initiative and resources injection of UACO. The parameter k is representative the coefficient of Design on the Incentive Contract of University Achievements Commercialization Offices Based on Principal-Agent Theory Copyright © 2010 SciRes JSSM 80 working capability of UACO, and it is relative to man- agement ability, scientific and technical level, marketing skills of UACO. Parameter denotes uncertain factors that influences achievements transformation of universi- ties, and it is a normal approximation distribution and let it be a random variable with mean of 0 and variance of 2 . Then the output of UACO could be expressed with the following linear function: ke (1) Here, Eke ,2 var()var( ) . That is to say, the level of hardworking and the level of working capability determine the mean of output of UACO, and the variance of output is only connected with that of endogenous ran- dom variable. Here, E represents mathematic expecta- tion operato r, and var means variance. Supposing that principal (university) is risk-neutral and agent (UACO) is risk-avoidance, and optimal con- tract is linear under the hypothesis of rational-economic agent [11], then linear contract is considered as following ()s (2) ()s refers to income of UACO (or its employees), and is fixed salary. is the share of UACO in its out- puts, it could be also called incentive intensity that uni- versity provides to UACO. A further formula could be gotten if expression (2 ) is substituted with (1), that is ()( )ske (3) then the revenue of university could be expressed by (,())()(1 )()vs ske , and ex- pected utility equ als to exp ected revenue accord ing to th e assumption of risk-neutral for principal (university), that is (,())[(1)()]Ev sEke (1 )ke (4) Let be the level of utter risk avoidance, and 0 . To express risk cost of agent with ()r , then 22 () /2r . If ()ce refers to the cost of working hard of UACO, and 2 () /2ce be is supposed for sim- plifying the problem. Here, b refers to cost coefficient and 0b. Therefore, the deterministic equivalence income of UACO is 22 [( )()/2]WEsce 222 /2 /2ke be (5) Let w be conservative income of agent, then indi- vidual rationality (IR) of agent could be expressed by 222 /2 /2ke bew (6) and the incentive compatibility (IC) of agent is 222 argmax{/ 2/ 2}ekebe (7) 3.2 Solution of the Incentive Model In order to compare expected income of university and UACO under the condition of asymmetric with that of symmetric information, the solution of incentive model under the condition of symmetric information is neces- sary to be discussed in brief. 1) Optimal contract under the condition of information symmetry The level of hardworking of agent could be observed by principal under the condition of symmetric informa- tion. The incentive compatibility (IC) of agent at the moment does not work because any level of e could be gotten and realized through an enforced co ntract meeting the requirement of individual rationality (IR). Therefore, the optimal contract under the condition of information symmetry could be obtained by solving the following optimal problem ,, 222 max(1 ) . .()/2/2 e Ev ke stIRke bew (8) The equal-sign in constraint condition of IR is ture in the above Formula (8) under the optimal circumstances of information symmetry, because it is not necessary for principal to pay agent more when information is sym- metric. Then the optimal problem of Formula (8) could have another expression as following 222 , max(/2/2) eke bew (9) To solve first order condition of the optimal problem in Equation (9), the expressions of Pareto optimal hard- working level (*e) and Pareto optimal incentive inten- sity (* ) could be gotten as following */ekb , *0 , (10) Substituting the equation of IR in the Formula (8) with the above results in the Formula (10), the expression of optimal fixed salary (* ) under the condition of infor- mation symmetry could be obtained 2 */2wk b (11) 2) Optimal contract under the condition of information asymmetry The level of hardworking of agent could not be ob- served by principal under the condition of asymmetric information. The incentive compatibility (IC) of agent at this moment does work. The maximization model of ex- pected utility function of agent could be established as following Design on the Incentive Contract of University Achievements Commercialization Offices Based on Principal-Agent Theory Copyright © 2010 SciRes JSSM 81 222 maxmax/ 2/ 2 ee EuWke be (12) For any given incentive contract, agent always selects an optimal hardworking level to maximize expected util- ity function. According to Mirrlees (1974) [12] and Holmstrom (1979) [10], the constraint of incentive com- patibility (IC) could be replaced by first order condition of maximization model of expected utility function of agent. For the Formula (12), first order condition of maximization is 0 Eu kbe e . Solving the equation, the expression of hardworking level under the condition of information asymmetry could be gained, and the constraint of incentive compatibility (IC) could also be described as the expression (IC): /ekb (13) Therefore, the optimal contract under asymmetric in- formation should satisfy the solution of the following conditions ,222 max(1) ..()/2/2 () / Ev ke s tIR kebew ICek b (14) Supposing that principal and agent are rational-eco- nomic, the equal-sign in constraint condition of IR is true in the Formula (14) when designing the optimal contract. Substituting the target function of the Formula (14) with the expressions of IR and IC, the optimal condition of the Formul a ( 14) coul d b e r e formula te d b y 22222 max //2/2kbk bw and first order condition of it could be expressed as 22 2 // 0kb kb , then the share o f output that university provides to UACO (namely incentive intensity) is 2 22 k kb (15) Putting expressions of Formulas (15) and (13) into the equal equation of IR in Formula (14), the expression of fixed salary ( ) under the condition of information asymmetry could be gained as 22 222 ()2(1/)wkbbb k (16) Consequently, the optimal contracts under information symmetry and asymmetry are listed in Table 1. fol- low- ing the synthetic results of the above analysis. 4. Analysis and Results The results will be analyzed from two sides of incentive contract and university revenue. The efficiency of achie- Table 1. The design of incentive contracts of UACO under the conditions of symmetric and asymmetric information Information symmetry Information asymmetry Hard- working level */ekb /ekb Share of output *0 22 2 /( )kkb Fixed salary 2 */2wk b 22 222 ()2(1/)wkbbbk vements transformation in universities is of brutally vital importance for the outputs of UACO and the revenue of university, so these latter two parts will be equivalent to the efficiency of achievements transformation in the fol- lowing analysis. 4.1 Analysis of Incentive Contracts Compared the incentive contracts under the conditions of information symmetry and information asymmetry, the following results could be brought to: Result 1: Incentive mechanism should be introduced in the salaries of UACO to enhance the efficiency of achievements commercialization in universities, for ex- ample implementing the wage system comprised fixed salaries and efficiency-related wages. According to the incentive contract under the condi- tion of asymmetric information, the share of outputs that UACO should be provided is 22 2 /( )kkb . Here 01 because 2 ,, 0b , that is, to get the best incentive effectiveness, 222 /( )kkb unit should be provided to UACO if 1 unit output value of achievements commercialization is produced by UACO. From this point of view, the unitary fixed wage system implemented for a long time has seriously hindered the advancement of achievements transformation, and it is urgent for universities to reform the wage system of UACO. Result 2: When the work ability of UACO is higher (larger k), or the willingness of working hard is stronger (smaller b), or the degree of risk aversion of UACO is smaller (smaller ), or outside uncertain factors are smaller (smaller 2 ), the wage system of lower fixed salary plus higher proportion of efficiency-related wage could be more effective for UACO to work hard and to boost the efficiency of commercialization. In certain cir- cumstances, the wage mechanism only for efficiency- related wage, even that state of it which we term zero fixed salary, could be adopted. The reason is that, according to Formula (15), first-order derivatives of respectively satisfy the conditions of 22 22 /2 /()0kkb kb , / 0b , /0 , 2 /0 , (the above calcula- Copyright © 2010 SciRes JSSM 82 tions are omitted here). Those first-order derivatives show that, the share of outputs ( ) is a monotone in- creasing function to the work ability of UACO (k), and is a monotone minus function to the willingness of working hard (b), a monotone minus function to the degree of risk aversion ( ), a monotone minus function to outside uncertain factors (2 ). According to Formula (16), w when 22 kb , that is, the fixed salary could be below to conservative income for agent when certain condition is satisfied. Furthermore, 0 when 22 kwb , it means that, the condition of zero fixed salary is happened. Certainly, the proportion of outputs required to share would be very high. Remarkably, zero fixed salary is a state of fully- mar- keting operation that UACO are in a high degree of autonomy, or even become an independent legal entity detached from universities. It is an operating pattern of UACO worth of being probed into. Result 3: The level of hardworking of UACO under the condition of asymmetric information is strictly less than that of symmetric information It is because 0<β<1, so e=βk/b<k/b, that is *ee. The result provides a rational explanation for the cur- rent states that it is lack of working enthusiasm and lack of active action of hunting for market demands in UACO. It is further verified that incentive measures should be drawn out to encourage UACO work hard to promote the efficiency of achievements commercialization, especially under the circumstances of information asymmetry. Result 4: Under the condition of information symme- try, UACO could be only paid for fixed salary because of *0 . When fixed salary exactly equals to conserva- tive income plus the cost of hardworking (that is 2 */2wk b ), a desired optimal hardworking level of universities could be reached, and Pareto optimal risk apportion and optimal hardworking level could be real- ized simultaneously. 4.2 Analysis of University Revenue (Efficiency of Commercialization) Connecting equations of (13), (14) and (15), the expres- sion Formula (18) of university revenue (a Ev) under the condition of asymmetric information could be obtained, and substituting Formula (8) with Formula (10), then we can get the expression Formula (17) of university reve- nue (vE s) under the condition of symmetric information. The results after collecting the forms could be seen in Table 2. The following results could be gotten from Formula (17) and (18). Result 5: The working ability of UACO is of great im- Table 2. University revenues under the conditions of sym- metric and asymmetric information University revenue Information symmetry2 2 sk Ev w b (17) Inform ation asymmetry4 22 2( ) ak Ev w bk b (18) portance to the efficiency of commercialization for uni- versities. The stronger the working ability, the more revenue is produced, then the higher efficiency of com- mercialization is taken place. Furthermore, a vital im- portant result is that, the efficiency of achievements commercialization has squared forward growth relation with working ability of UACO. It is because of 422 2222 20 2( ) a Ev kkb kbkb , that is, the efficiency of achievements commercialization (a Ev) is a monotone increasing function to square of working ability (2 k). What we learn from result 5 is that, it is need to adjust staff structure of UACO, to stress importance of techni- cal ability, marketing skills and administrative ability for officers of UACO in China, and UACO managers should have all these abilities and skills. Result 6: The efficiency of achievements commer- cialization is directly proportional to the willingness of hardworking of UACO, and is inversely proportional to the degree of risk aversion of UACO and to outside un- certain factors. It is because the efficiency of achievements commer- cialization of universities (a Ev) is a monotone minus function to willingness of working hard (b), to risk aver- sion degree ( ), and to outside uncertain factors (2 ). The revelation of this result is that, for the enhance- ment of commercialization efficiency of universities, the breakthrough points of it could also be from correcting the working attitudes and reducing the mood of risk aversion of UACO officers. Governments at all levels and universities should create a favorable atmosphere for achievements commercialization of universities, and re- duce the adverse impact of outside uncertain factors on the commercialization of research findings in universi- ties. 5. Conclusions The value of this paper is that, a principal-agent relation between university and UACO is analyzed, and the op- timal incentive contract designing model is proposed on the question of enhancing the efficiency of universities Copyright © 2010 SciRes JSSM 83 achievements commercialization. The results show that, the efficiency of universities achievements commerciali- zation has a squared forward growth relation with UACO working ability, and it is directly proportional to will- ingness of hardworking of UACO, and is inversely pro- portional to risk aversion degree of UACO and to outsid e uncertainty. The level of hardworking of UACO under the condition of information asymmetry is strictly less than that of information symmetry. For the enhancement of commercialization efficiency, universities need to set up incentive mechanism in the wage system of UACO, and to determinate optimal fixed salary and incentive intensity on the basis of UACO working ability, willing- ness of hardworking, degree of risk aversion and outside uncertain factors. In addition, the tentative idea of fully-marketing op- eration pattern for UACO that produced from zero fixed salary, and a series of problem initiated from it, for in- stance, the pattern is feasible under what kind of circum- stance and how does the patter work, are all worth of being discu ssed further. 6. Acknowledgements This research is supported by the National Natural Sci- ence Foundation of China (No. 70772074) and National Social Science Foundation of China (No. BIA090049). 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