Chapter 18: Copyright law and royalty contracts
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Economic theory, and microeconomics in particular, has a strong tradition of studying incentive based decision making. In turn, one of the principal mechanisms used to give incentives to decision makers is a contract. Above all, a contract is a means under which one economic agent can give incentives to another in order that the second of the two parties carries out the decisions that best suit the first. Contracts serve more than one fundamental purpose. Nevertheless, their principle function is that they allow for the participants to add value by specialization and the gains from trade, and they allow for that additional value to be shared, that is, for the contracting parties to be compensated for their efforts. When two parties (say an author and an intermediary) decide to enter into a contract, it is because they recognize that by cooperating together additional wealth is created. This additional wealth is the result of specialization, and is the difference between what can be charged to the next agent in the value chain (perhaps retailers, perhaps direct consumers) when the intermediary is present and what could be charged at that point without the intermediary. The contract is the mechanism that allocates that additional wealth between the two parties whose cooperation created it.

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