In the course of the last few decades, universities have been increasingly involved in third stream activities, which often result in increased interactions with firms aimed at the creation, dissemination and exploitation of knowledge.

The purpose of this paper is to develop a theoretical framework in order to understand the economic incentives underpinning firms’ and universities’ mutual engagement in third stream activities, as well as the economic rationale underpinning the introduction of public incentives supporting these activities. The paper argues that the tools of the economics of knowledge and the conceptualization of knowledge production as an activity characterized by complexity, uncertainty, path dependency, idiosyncrasy and ambiguous appropriability conditions, can fulfill these objectives.