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Secrecy and Patents: Theory and Evidence from the Uniform Trade Secrets Act

46 Pages Posted: 12 Jun 2015 Last revised: 6 Aug 2017

Ivan P. L. Png

National University of Singapore (NUS)

Date Written: February 1, 2017

Abstract

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

Png, Ivan P. L., Secrecy and Patents: Theory and Evidence from the Uniform Trade Secrets Act (February 1, 2017). Available at SSRN: https://ssrn.com/abstract=2617266 or http://dx.doi.org/10.2139/ssrn.2617266

Ivan Png (Contact Author)

National University of Singapore (NUS) ( email )

Singapore, 117543
Singapore
+65 6516-6807 (Phone)

HOME PAGE: http://sites.google.com/site/iplpng/

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