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Abstract:
We propose a model of ownership and control restructuring in closely-held corporations. The model exemplifies a novel explanation for the prevalence and persistence of the separation of ownership from control: efficiency in the market for corporate control is more easily achieved when ownership of cash flow rights is not concentrated in the hands of insiders. Using a mechanism design approach, we fully characterize the optimal restructuring mechanism. This mechanism requires increasing the number of shares of the incumbent insider if he remains in control, while giving him a golden parachute that may include both stock and cash if he is deposed. Combining ownership and control is optimal only when the scope for agency costs is extreme. The model generates several novel empirical predictions.

Ownership, corporate control, restructuring

Abstract:
With its powerful mandate to unify patent law, the Court of Appeals for the Federal Circuit (CAFC), established in 1982, represents an intriguing recent example of an institutional innovation with potentially broad economic consequences. Given sole responsibility for handling patent appeals and widely regarded as pro-patent, the CAFC has indeed produced a new body of patent law. Unfortunately, research has yet to identify and explain accurately its impact on patent litigation, patenting and inventive activity. Given that both the amount of patent litigation and the number of patents have grown substantially during the last twenty years, the time is ripe to address this directly. We present and analyze a novel data set, spanning 1953-2002, that reflects more than 6,000 decisions published in the United States Patents Quarterly (USPQ).

Specifically, we: (1) compare directly the tendencies of the CAFC to those of its predecessor appeals courts; (2) consider separately the issues of validity and infringement; and (3) examine how appeals court tendencies affect the actions of lower courts and/or litigants. We find that the CAFC has been significantly more reluctant to affirm patents invalid than its predecessors but has not been more reluctant to affirm patents not infringed. As a result, district courts have decided patents invalid significantly less often, patentees have appealed invalid decisions significantly more often and the infringement inquiry has grown in importance.

patent, litigation, structural break, time series analysis

Abstract:
In a bilateral relationship where the supplier of an intermediate good has to make a relationship-specific investment but cannot write or enforce a complete contract, the standard hold-up problem of underinvestment arises. We show that this problem is aggravated when the buyer is located in a different country and that country has a tariff on imports of the intermediate good. In that context, trade liberalization enhances international trade through three distinct mechanisms: it directly reduces the cost of imported intermediate goods, it induces foreign suppliers to increase cost-reducing investments, and it may prompt the formation of vertical multinational firms. The extra investment increases the value of international bilateral relationships and amplifies the impact of lower tariffs on trade flows. The possible formation of vertical multilateral firms further increases investment and trade. These indirect effects of trade liberalization help explain why standard trade models fail to explain the observed large responses of trade volumes to small tariff reductions and rationalize current trends toward increased foreign outsourcing and intra-firm trade.

Trade Liberalization, Outsourcing, Hold-Up Problem

Abstract:
In 1982, the US Congress established the Court of Appeals for the Federal Circuit (CAFC) as the sole appellate court for patent cases. Ostensibly, this court was created to eliminate inconsistencies in the application and interpretation of patent law across federal courts, and thereby mitigate the incentives of patentees and alleged infringers to "forum shop" for a preferred venue. We perform the first econometric study of the extent of non-uniformity and forum shopping in the pre-CAFC era and of the CAFC's impact on these phenomena. We find that in patentee-plaintiff cases the pre-CAFC era was indeed characterized by significant non-uniformity in patent validity rates across circuits and by forum shopping on the basis of validity rates. We find weak evidence that the CAFC has increased uniformity of validity rates and strong evidence that forum shopping on the basis of validity rates ceased several years prior to the CAFC's establishment. In patentee-defendant cases, we find that validity rates are lower on average, but do not find either significant non-uniformity of validity rates across circuits or significant forum shopping.

patents, patent litigation, forum shopping, federal circuit, appeals, appellate courts

Abstract:
Past work has shown that asymmetric information and asymmetric ownership affect the possibility of efficient dissolution of partnerships. We show that \textit{control} is also a central determinant of the possibility of efficient implementation. We demonstrate this point by analyzing a benchmark case of asymmetric control, where a single partner exercises complete control under the status quo partnership. We show that two-person partnerships cannot be dissolved efficiently with any incentive compatible, individually rational mechanism, regardless of the ownership structure, but that this impossibility result can be reversed if the number of partners is sufficiently large. Among other results, we show also that equal-shares partnerships are not generally the easiest to dissolve.

Mechanism design, efficient trading, asymmetric control, partnerships

Abstract:
This paper examines the impact of three patent damage regimes on licensing and competition between a patentee and imitator. We focus on product patents in a differentiated, duopoly setting. Neither per-unit royalties nor fixed fees under efficient licensing are unique in equilibrium. As a result, the "reasonable royalty" damage regime's application of a hypothetical negotiation gives the court significant discretion in assigning damages. The lost profits regime, the only one that may deter infringement, typically yields the highest incentives to innovate for highly valuable products. The unjust enrichment regime is weakest. Our results offer an efficiency argument for abandoning it.

Patent, litigation, damages, spatial, differentiated

Abstract:
In an incomplete contracts model where there are otherwise no social motives for protection, we show that protection is socially beneficial when a buyer outsources customized inputs from a specialized domestic supplier while also purchasing generic inputs from the world market. The reason is that a tariff worsens the outside option of the buyer, thereby increasing the supplier's incentives to invest. Since under free trade the supplier would underinvest due to hold-up problems, welfare rises with protection for relatively low tariff levels. But protection always distorts sourcing decisions, and is ineffective at altering investment incentives whenever the specialized supplier is foreign, as in that case tariffs have no effect on the parties' negotiation surplus. Tariffs can be particularly harmful when the firms have curbed opportunism through vertical integration, as in that case they distort sourcing and induce excessive investment. Furthermore, protection promotes inefficient organizational choices. The reason is that tariff revenue, which is external to firms, drives a wedge between the private and the social gains of both offshoring and vertical integration, leading to excessive domestic integration.

International trade, tariffs, hold-up problem, sourcing, organizational form

Abstract:
This paper studies the puzzle of what caused the surge in US patenting in the 1980s. I first argue that, under the standard view of patents, where value depends only on the appropriable rents created by the patent's exclusive property rights over related technologies and product markets, this puzzle cannot be solved. I then adopt an alternative theory, based on a growing legal literature, where patents confer additional value by minimizing asymmetric information between patentees and observers. Under this view, which has yet to be analyzed by economists, the puzzle can be solved. I relate statistics on patent applications to statistics on patent litigation to describe the puzzle and frame my inquiry. There is strong evidence that these statistics are associated. Time series of US patent applications, new patent litigations and patent litigation outcomes have significant, synchronized structural breaks, and the 1982-83 break dates provide evidence that supports the "Friendly Court Hypothesis," the contention that the establishment of the Court of Appeals for the Federal Circuit (CAFC), in 1982, is the source of the surge in patenting. Also, statistics on US patent litigation rates by foreign inventors explain why some foreign inventors' US applications growth did not surge, providing the "missing piece" of the puzzle. Under the alternative theory of patent value, I show that such a pattern is a predictable outcome of a surge in patent strength. Under the standard view, it is not possible.

patents, litigation, transactions costs, international

Abstract:
This paper studies the problem of partnership dissolution in the context of asymmetric information. Past work has shown that ownership share endowments, interdependence of partners' valuations, and asymmetric control all affect the possibility of efficient dissolution. In this paper, I argue that the effectiveness of the existing partnership in generating value, which has not been studied, is of first-order importance for efficient implementation. I show, in a novel class of cooperative partnerships characterized by ex ante interdependence of valuations, that effectiveness is significantly more important than share endowments. Intuitively, as the effectiveness of cooperation between partners (and thus partnership value) increases, the gains from dissolving decrease but the informational rents remain constant, so efficient dissolution is unambiguously more difficult to achieve. For sufficiently high effectiveness, efficient dissolution is Pareto-improving but is impossible for any pattern of share endowments. For sufficiently low effectiveness, however, efficient dissolution is possible for all patterns of shares. The existence of efficient implementation depends on share endowments only for moderately effective partnerships. This helps to explain the persistence of equal-shares partnerships and the prevalence of Texas Shootout dissolution mechanisms in practice.

Mechanism design, trading, dissolution, partnerships

Abstract:
In their 2003 Lawrence R. Klein Lecture, Michele Boldrin and David Levine argue that intellectual property rights may be damaging to social welfare. As empirical evidence for their theory they offer James Watt's steam engine patent, claiming that it delayed the Industrial Revolution by as much as two decades. We show that this claim, as well as the more general claim that Watt's story supports Boldrin and Levine's theory, rests upon a distorted summary of the historical record.

Abstract:
This paper formalizes a non-cooperative explanation for pre-merger price increases. When consumers face switching costs, firms have strong incentives to offer bargain prices to lock in consumers whom they can exploit in the future. A future merger reduces a firm's incentive to gain current market share, however, because the firm anticipates sharing future profits. Focusing on near-term profit, it chooses pre-merger prices higher than prices absent a merger. This obtains for both horizontally related and unrelated merging partners. Mergers are profitable in both cases. Price dynamics depend on the horizontal relationship. These results have implications for empirical work on mergers.

mergers, switching costs, spatial competition, oligopoly

Abstract:
James Watt’s 1769 patent is widely supposed to have stood in the way of the development of high-pressure steam technology until it finally expired in 1800. We dispute this popular claim. We show that, although it is true that high-pressure steam technology developed only after the expiration of Watt’s patent, the delay was due to factors other than that patent itself, including the widely-held opinion that high-pressure engines were excessively risky. Indeed, Watt’s monopoly rights may actually have hastened the development of the high-pressure steam engine, by causing would-be rivals to revive a supposedly obsolete technology so as to evade his patent.

engine, high-pressure, steam, patent, industrial revolution

Abstract:
Treating control as an asset that can be bought and sold, we introduce a model of the simultaneous and separable trading of ownership and control in a private information setting. The model provides a novel explanation for the prevalence and persistence of the separation of ownership from control in modern corporations: efficiency in the market for corporate control is more easily achieved when ownership is not concentrated in the hands of the manager. The central reason is that low managerial ownership reduces informational rents in the market for control. Using a mechanism design approach, we fully characterize the optimal mechanism for restructuring ownership and control. Under the optimal mechanism, corporations typically increase the number of shares of the incumbent manager if he remains in control, and give him a generous golden parachute that includes both stock and cash if he is deposed. By contrast, combining ownership and control is optimal only if agency costs are extreme.

corporate control, mechanism design, ownership, restructuring

Abstract:
We show that standard winner-pay auctions are inept fund-raising mechanisms because of the positive externality bidders forgo if they top another's high bid. Revenues are suppressed as a result and remain finite even when bidders value a dollar donated the same as a dollar kept. This problem does not occur in lotteries and all-pay auctions, where bidders pay irrespective of whether they win. We introduce a general class of all-pay auctions, rank their revenues, and illustrate how they dominate lotteries and winner-pay formats. The optimal fund-raising mechanism is an all-pay auction augmented with an entry fee and reserve price.