The Welfare Implications of Non-Patentable Financial Innovations
Investment Banks invest in R&D to design innovative securities even when imitation is possible, i.e., when innovations cannot be patented. We show how a financial institution can profit from the development of financial products even if they are unpatentable. For certain types of financial products innovating investment banks have an information advantage over imitators. This information advantage makes them better competitors and market leaders. The mere possibility of costless imitation drives innovators’ profits down, but still keeps them positive. The absence of patents allows part of the surplus generated by the innovation to be allocated to investors. The extent of surplus sharing depends on the degree of asymmetry in the information owned by imitators and innovators and on the total number of innovators. The larger this asymmetry, the higher the innovator’s profits and the lower the investor’s surplus. With more than one innovator all the surplus goes to investors.
|Date of creation:||Mar 2001|
|Date of revision:|
|Contact details of provider:|| Postal: 40 bd. du Pont d'Arve, Case postale 3, CH - 1211 Geneva 4|
Phone: 41 22 / 312 09 61
Fax: 41 22 / 312 10 26
Web page: http://www.swissfinanceinstitute.ch
More information through EDIRC
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.:
- Tufano, Peter, 1989. "Financial innovation and first-mover advantages," Journal of Financial Economics, Elsevier, vol. 25(2), pages 213-240, December.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fam:rpseri:rp82. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja)
If references are entirely missing, you can add them using this form.