Secrecy and Patents: Theory and Evidence from the Uniform Trade Secrets Act
46 Pages Posted: 12 Jun 2015 Last revised: 6 Aug 2017
Date Written: February 1, 2017
How should firms use patents and secrecy as appropriability mechanisms? Consider technologies that differ in the likelihood of being invented around or reverse engineered. Here, I develop the profit-maximizing strategy: (i) on the internal margin, the marginal patent balances appropriability relative to cost of patents vis-a-vis secrecy, and (ii) on the external margin, commercialize products that yield non-negative profit. To test the theory, I exploit staggered enactment of the Uniform Trade Secrets Act, using other uniform laws as instruments. The Act was associated with 38.6 percent fewer patents after one year, and smaller effects in later years. The Act was associated with larger effect on companies that earned higher margins, spent more on R\&D, and faced weaker enforcement of covenants not to compete. The empirical findings are consistent with businesses actively choosing between patent and secrecy as appropriability mechanisms, and appropriability affecting the number of products commercialized.
Keywords: patents, trade secrets, innovation
JEL Classification: O31, O34
Suggested Citation: Suggested Citation