Textbook models fail to explain royalty and fee-pricing arrangements in the patent and trade-secret licenses discussed here. A theory of royalty pricing as an efficient tax and as a performance bond explains more. Royalty taxes help coordinate user outputs to maximize the joint value of a common customer pool. Royalties, by tying owner income to licensee sales directly, also encourage owners to protect rights against infringement over time. Copyright 1991 by University of Chicago Press.