The Goldilocks Hypothesis: Balancing Intellectual Property Rights at the Boundary of the Firm

Abstract:     
Recent scholarship has begun to assess the role of intellectual property rights in the theory of the Coasean firm. Some of this scholarship has looked at the effects of intellectual property on decisions to "make or buy" inputs to production. Other scholarship has looked at the effects of intellectual property on allocation of resources between employees and the firm. In this paper, we integrate these two lines of scholarship, positing a "Goldilocks hypothesis" for the proper disposition of intellectual property rights. We argue that to properly allocate resources within the firm, property rights must be calibrated so as to avoid on the one hand misappropriation of firm resources when rights are inadequate, and on the other hand dissipation of employee incentives when rights are excessive. Similarly, we argue that in order to properly manage transactions costs at the edge of firms, property rights must be calibrated so as to avoid on the one hand inefficient integration into the firm of specialized functions when property rights are inadequate, and on the other hand a fragmented anti-commons of specialty firms when property rights are excessive. Thus, we conclude that in order to contribute to the efficient structure of firms, intellectual property rights can be neither too weak nor too strong, but must be constituted "just right."

Keywords: intellectual property, patent, copyright, trade secrecy, theory of the firm

JEL Classifications: D21, D23, E24, J41, K22, L22, L23, O31, O32, O34

Working Paper Series