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From Thought to Practice: Appropriation and Endogenous Market Structure with Imperfect Intellectual Property Rights

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  • Mariagiovanna Baccara
  • Ronny Razin

Abstract

We address the problem faced by innovators who have an idea for a marketable product but must hire employees to bring the product to the market. Information leakage implies that newly-hired employees become informed of the idea and may attempt to bring the product to the market themselves. We develop a bargaining model that accounts for this problem. In this model, employee’s rents endogenously reflect the bargaining power vis-à-vis the firm that is due to the knowledge of the information. The model has a unique symmetric equilibrium in which the innovator appropriates a sizable share of the surplus despite the absence of property rights for ideas. We show that this share stays bounded away from zero even as the number of agents required in the development grows to infinity. We also derive the conditions under which monopoly or competition arise on the product market. We find that when the degree of potential competition on the product market is high enough, a monopoly is generated by hiring all potential competitors within the same firm. Finally, the link between intellectual property rights enforcement and industry performance is explored, and normative implications are derived.
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Suggested Citation

  • Mariagiovanna Baccara & Ronny Razin, 2003. "From Thought to Practice: Appropriation and Endogenous Market Structure with Imperfect Intellectual Property Rights," Working Papers 03-11, New York University, Leonard N. Stern School of Business, Department of Economics.
  • Handle: RePEc:ste:nystbu:03-11
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Sudipto Bhattacharya & Sergei Guriev, 2006. "Patents vs. Trade Secrets: Knowledge Licensing and Spillover," Journal of the European Economic Association, MIT Press, vol. 4(6), pages 1112-1147, December.
    2. Baccara, Mariagiovanna & Razin, Ronny, 2004. "Curb Your Innovation: Corporate Conservatism in the Presence of Imperfect Intellectual Property Rights," CEPR Discussion Papers 4466, C.E.P.R. Discussion Papers.
    3. Da Rin, Marco & Nicodano, Giovanna & Sembenelli, Alessandro, 2006. "Public policy and the creation of active venture capital markets," Journal of Public Economics, Elsevier, pages 1699-1723.
    4. Bhattacharya, Sudipto & Guriev, Sergei, 2004. "Knowledge Disclosure, Patents and Optimal Organization of Research and Development," CEPR Discussion Papers 4513, C.E.P.R. Discussion Papers.
    5. John Asker & Alexander Ljungqvist, 2010. "Competition and the Structure of Vertical Relationships in Capital Markets," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 599-647, June.
    6. Marini, Marco A., 2005. "The value of a new idea: knowledge transmission, workers' mobility and market structure," MPRA Paper 1687, University Library of Munich, Germany, revised Jan 2006.
    7. John Asker & Estelle Cantillon, 2010. "Procurement when price and quality matter," RAND Journal of Economics, RAND Corporation, pages 1-34.
    8. Mariagiovanna Baccara, 2007. "Outsourcing, information leakage, and consulting firms," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 269-289, March.

    More about this item

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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