The white elephant in IP management market frictions, market connections and escalation of commitment

This paper examines the maintenance decisions for intellectual property (IP) that require continuous investment in an uncertain market environment. We propose a microfoundation-based theory that incorporates market friction, market connection and escalation of commitment from the managers. In a dynamic market with frictions, managers with weak market connection need longer time to reach successful transactions, compared to the strongly connected ones. Moreover, escalating behavior could make it harder for the less connected managers to abandon their IP assets even when the embedded value becomes obsolete, which leads to inefficiently longer maintenance and an unforeseen social loss. The model further suggests that removing frictions in the market facilitates transactions and reduces the performance gap between different managers. We provide empirical evidence that is consistent with the theory, using data on patents from individual innovators with different levels of market connection. The study contributes to the discussion on organizational implications of escalation of commitment, and also shed light on the importance of market connection to value capture of small innovative businesses.