Optimal Patenting and Licensing of Financial Innovations

Management Science, Forthcoming

Posted: 22 Apr 2008

See all articles by Praveen Kumar

Praveen Kumar

University of Houston - Department of Finance

Stuart M. Turnbull

University of Houston - C.T. Bauer College of Business

Abstract

Recent court decisions, starting with the State Street decision in 1998, allow business methods to be patentable and now give financial institutions the option to seek patent protection for financial innovations. This new patentability paradigm and the heterogeneity of characteristics associated with financial innovations, poses an immediate decision problem for senior management: what to patent. We present a parsimonious decision framework that answers this question. We show that for innovations with certain characteristics, it is optimal not to patent, even if the option of patenting and licensing is available. Our model emphasizes the role of embedded real options that arise from certain types of financial innovations. The model provides an explanation of observed patenting behavior of financial institutions and the success of a wide class of innovations, including swaps, credit derivatives, and pricing algorithms.

Keywords: Business Methods, Financial Innovations, Patents, Licenses, Real Options

JEL Classification: G20, L10, O31

Suggested Citation

Kumar, Praveen and Turnbull, Stuart M., Optimal Patenting and Licensing of Financial Innovations. Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1123167

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Stuart M. Turnbull

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

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