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Patents vs Trade Secrets: Knowledge Licensing and Spillover

  • Sudipto Bhattacharya


    (London School of Economics and CEPR)

  • Sergei Guriev


    (New Economic School/CEFIR and CEPR)

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.

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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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