We develop a model of two-stage cumulative research and development (R&D), in which one Research Unit (RU) with an innovative idea bargains to license her nonverifiable interim knowledge exclusively to one of two competing Development Units (DUs) via one of two alternative modes: an Open sale after patenting this knowledge, or a Closed sale in which precluding further disclosure to a competing DU requires the RU to hold a stake in the licensed DU’s post-invention revenues. Both modes lead to partial leakage of RU’s knowledge from its description, to the licensed DU alone in a closed sale, and to both DUs in an open sale. The open sale is socially optimal; yet the contracting parties choose the closed sale whenever the interim knowledge is more valuable and leakage is sufficiently high. If the extent of leakage is lower, more RUs choose open sales, generating a non-monotonic relationship between the strength of Intellectual Property Rights (IPR) and aggregate R&D expenditures and the overall likelihood of development by either DU.
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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number
w0064.
Length: 40 pages Date of creation: Feb 2004 Date of revision:
Feb 2006 Publication status: Forthcoming in The Journal of European Economic Association Handle: RePEc:cfr:cefirw:w0064
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Horowitz, Andrew W & Lai, Edwin L-C, 1996.
"Patent Length and the Rate of Innovation,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 785-801, November.
REY, Patrick & TIROLE, Jean, 2003.
"A Primer on Foreclosure,"
IDEI Working Papers
203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005.
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