J. Service Science & Management, 2010, 3 : 78 -83
doi:10.4236/jssm.2010.31009 Published Online March 2010 (http://www.SciRP.org/journal/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.
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 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 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 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-

Design on the Incentive Contract of University Achievements Commercialization Offices Based on Principal-Agent Theory 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

Design on the Incentive Contract of University Achievements Commercialization Offices Based on Principal-Agent Theory 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).
The authors want to give their acknowledgement to Pro-
fessor Liu Guoxin and Doctor Yan Junzhou who gave
valuable comments on the pa per.
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