Little Patents and Big Secrets: Managing Intellectual Property

Exploitation of an innovation commonly requires some disclosure of enabling knowledge (e.g., to obtain a patent or induce complementary investment). When property rights offer only limited protection, the value of the disclosure is offset by the increased threat of imitation. Our model incorporates three features critical to this setting: innovation creates asymmetric information, innovation often has only limited legal protection, and disclosure facilitates imitation. Imitation depends on inferences the imitator makes about the innovator's advance. We find an equilibrium in which small inventions are not imitated, medium inventions involve a form of "implicit licensing," and large inventions are protected primarily through secrecy when property rights are weak.