An Economic Analysis of Trade-Secret Protection in Buyer-Seller Relationships
Journal of Law, Economics & Organization 27 (2011), 137-158
46 Pages Posted: 9 Nov 2007 Last revised: 15 May 2014
Date Written: July 1, 2009
Abstract
The economic analysis of trade-secret protection has traditionally focused on the interests of companies to conceal information from competitors in order to gain a competitive advantage through trade-secret law. This has neglected cases in which the interest is not in concealing information from competitors, but from trading partners. We investigate trade-secret protection in such cases. Frequently, asymmetric information will lead to inefficient trade; at the same time, protecting private information might create incentives for socially desirable investments. We model this trade-off in a simple buyer-seller model and find that the optimal fine for violations of trade secrets is positive. In general, however, the welfare effects of increasing a fine are ambiguous. We discuss conditioning the legal protection on a minimum investment by the informed party to conceal the information, and argue that this helps applying trade-secret protection only when it increases welfare. This rationalizes important features of current legal practice.
Keywords: disclosure of information, hold-up problems, trade secrets
JEL Classification: K2, D82
Suggested Citation: Suggested Citation
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