We study how licensing affects the allocation of innovation in pharmaceutical R&D. We develop a model in which projects differ in both quality and innovation regime, distinguishing between incremental and novel innovations. Information precision is higher for incremental projects and lower for novel ones, generating different equilibrium dynamics in the market for technology. The model predicts that licensing sustains positive selection and competitive return equalization for incremental innovation, while novel projects may exhibit weaker screening consistent with lemons-type frictions. Using product-level data and Double Machine Learning methods, we test these predictions across success probabilities and monetary returns. We find that licensing increases success probability overall, but return equalization holds primarily for incremental projects. For novel innovation, licensing does not exhibit the same equilibrium adjustment, suggesting residual market imperfections. Instrumenting for licensing using exogenous pipeline shocks confirms this pattern causally: the competitive risk-return trade-off is preserved for incremental 'rushed' licenses, but it breaks down for novel ones. Our results reconcile evidence on both competitive efficiency and information frictions in markets for technologies, showing that market performance depends systematically on the type of innovation being transacted.
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