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Profitable Innovation Without Patent Protection: The Case of Derivatives

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Author Info

  • Helios Herrera

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

  • Enrique Schroth

    (Univeristy of Lausanne)

Abstract

Investment banks develop their own innovative derivatives to underwrite corporate issues but they cannot preclude other banks from imitating them. However, during the process of underwriting an innovator can learn more than its imitators about the potential clients. Moving first puts him ahead in the learning process. Thus, he develops an information advantage and he can capture rents in equilibrium despite being imitated. In this context, innovation can arise without patent protection. Consistently with this hypothesis, case studies of recent innovations in derivatives reveal that innovators keep private some details of their deals to preserve the asymmetry of information.

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File URL: http://ftp.itam.mx/pub/academico/inves/herrera/03-02.pdf
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Bibliographic Info

Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0302.

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Length: 40 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:cie:wpaper:0302

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Related research

Keywords: Financial innovation; first-mover advantages; asymmetric information; learning-by-doing;

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References

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  1. Michele Boldrin & David K Levine, 2000. "Perfectly Competitive Innovation," Levine's Working Paper Archive 1996, David K. Levine.
  2. Peter Tufano, 1995. "Securities Innovations: A Historical And Functional Perspective," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 90-104.
  3. Tufano, Peter, 1989. "Financial innovation and first-mover advantages," Journal of Financial Economics, Elsevier, vol. 25(2), pages 213-240, December.
  4. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
  5. Reinganum, Jennifer R., 1982. "Uncertain Innovation and the Persistence of Monopoly," Working Papers 431, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  7. Miller, Merton H., 1986. "Financial Innovation: The Last Twenty Years and the Next," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(04), pages 459-471, December.
  8. Josh Lerner, 2000. "Where Does State Street Lead? A First Look at Finance Patents, 1971-2000," NBER Working Papers 7918, National Bureau of Economic Research, Inc.
  9. Benoit, Jean-Pierre, 1985. "Innovation and Imitation in a Duopoly," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 99-106, January.
  10. Diamond, Douglas W, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 709-37, August.
  11. Bhattacharyya, Sugato & Nanda, Vikram, 2000. "Client Discretion, Switching Costs, and Financial Innovation," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 1101-27.
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Citations

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Cited by:
  1. Michele Boldrin & David K Levine, 2010. "Quality Ladders, Competition and Endogenous Growth," Levine's Working Paper Archive 661465000000000028, David K. Levine.
  2. Boldrin, Michele & Levine, David K., 2008. "Perfectly competitive innovation," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 435-453, April.
  3. David Encaoua & Dominique Guellec & Martinez Catalina, 2011. "Sistemas de patentes para fomentar la innovacion: lecciones de analisis economico," Post-Print halshs-00743037, HAL.
  4. Comin, D., 2002. "R&D? A Small Contribution to Productivity Growth," Working Papers 02-01, C.V. Starr Center for Applied Economics, New York University.
  5. David Encaoua & Dominique Guellec & Catalina Martínez, 2006. "Patent Systems for Encouraging Innovation: Lessons from Economic Analysis," Post-Print halshs-00177614, HAL.
  6. David Encaoua & Dominique Guellec & Catalina Martínez, 2010. "Sistemas de patentes para fomentar la innovación: Lecciones de análisis económico," Working Papers 1015, Instituto de Políticas y Bienes Públicos (IPP), CSIC.
  7. Chiara Oldani, 2005. "An Overview of the Literature about Derivatives," Macroeconomics 0504004, EconWPA.
  8. David Encaoua & Dominique Guellec & Catalina Martínez, 2006. "Patent Systems for Encouraging Innovation: Lessons from Economic Analysis," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00177614, HAL.

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