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Profitable Innovation Without Patent Protection: The Case of Derivatives

  • Helios Herrera

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

  • Enrique Schroth

    (Univeristy of Lausanne)

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
File Function: First version, 2003
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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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  1. Peter Tufano, 1995. "Securities Innovations: A Historical And Functional Perspective," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 90-104.
  2. Tufano, Peter, 1989. "Financial innovation and first-mover advantages," Journal of Financial Economics, Elsevier, vol. 25(2), pages 213-240, December.
  3. 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.
  4. 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.
  5. Josh Lerner, 2004. "Where Does State Street Lead? First Look at Finance Patents, 1971-2000," Levine's Working Paper Archive 122247000000000497, David K. Levine.
  6. Michele Boldrin & David K Levine, 2002. "Perfectly Competitive Innovation," Levine's Working Paper Archive 625018000000000192, David K. Levine.
  7. Enrique Schroth, 2002. "Innovation and First-Mover Advantages in Corporate Underwriting: Evidence from Equity Linked Securities," FAME Research Paper Series rp74, International Center for Financial Asset Management and Engineering.
  8. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  9. Steven A. Sharpe, 1989. "Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships," Finance and Economics Discussion Series 70, Board of Governors of the Federal Reserve System (U.S.).
  10. 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.
  11. Diamond, Douglas W, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 709-37, August.
  12. Benoit, Jean-Pierre, 1985. "Innovation and Imitation in a Duopoly," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 99-106, January.
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