Property Rights and Frictions in the Sale of Patents

50 Pages Posted: 13 Nov 2016  

Jeffrey M. Kuhn

University of North Carolina (UNC) at Chapel Hill - Management-Strategy Area

Date Written: November 6, 2016

Abstract

Patent scope is central to the sale of ideas, which can spur economic growth and provide significant gains from trade. Awarding an inventor a patent on a new idea partially solves a commitment problem that would otherwise prevent the inventor from selling the idea. (Arrow, 1962). In the absence of a patent, a prospective buyer cannot credibly promise not to steal the idea should the inventor reveal it, while the inventor cannot credibly promise to reveal the idea should the prospective buyer pay for it. A firm's ability to use a particular patent to overcome this transactional hurdle derives from two factors: (1) the scope of the patent's legal right to exclude and (2) the effectiveness of that legal right in providing market exclusivity. I first show that a broader patent is more likely to be sold by employing a causal instrument that provides a plausibly exogenous shock to the scope of a patent's legal right to exclude, holding fixed the underlying idea. I then examine variation in the effectiveness of the right by interacting the instrument with endogenous firm, industry, and market characteristics. These results shed light on how firms profit from innovation and also connect the important but understudied market for patents, widely believed to be illiquid and inefficient, with fundamental research about how markets function in other contexts.

Keywords: innovation, patents, intellectual property, right to exclude, market exclusivity

JEL Classification: O3, O30, O31, O32, O34, L11, D4, D49

Suggested Citation

Kuhn, Jeffrey M., Property Rights and Frictions in the Sale of Patents (November 6, 2016). Available at SSRN: https://ssrn.com/abstract=2865293 or http://dx.doi.org/10.2139/ssrn.2865293

Jeffrey M. Kuhn (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Management-Strategy Area ( email )

Chapel Hill, NC 27599
United States

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