Modularity and Intellectual Property Protection

49 Pages Posted: 14 Jan 2014 Last revised: 13 Mar 2015

See all articles by Carliss Y. Baldwin

Carliss Y. Baldwin

Harvard Business School

Joachim Henkel

TUM School of Management - Technical University of Munich (TUM)

Date Written: June 26, 2014


Modularity is a means of partitioning technical knowledge about a product or process. When state-sanctioned intellectual property (IP) rights are ineffective or costly to enforce, modularity can be used to hide information and thus protect IP. We investigate the impact of modularity on IP protection by formally modeling the threat of expropriation by agents. The principal has three options to address this threat: trust, licensing, and paying agents to stay loyal. We show how the principal can influence the value of these options by modularizing the system and by hiring clans of agents, thus exploiting relationships among them. Extensions address screening and signaling in hiring, the effects of an imperfect legal system, and social norms of fairness. We illustrate our arguments with examples from practice.

Keywords: Modularity, value appropriation, intellectual property, relational contracts, clans

Suggested Citation

Baldwin, Carliss Y. and Henkel, Joachim, Modularity and Intellectual Property Protection (June 26, 2014). Harvard Business School Finance Working Paper No. 14-046, Available at SSRN: or

Carliss Y. Baldwin (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

Joachim Henkel

TUM School of Management - Technical University of Munich (TUM) ( email )

Arcisstr. 21
Munich, D-80333

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