Profitable Innovation Without Patent Protection: The Case of Derivatives

International Center for Financial Asset Management and Engineering Working Paper

41 Pages Posted: 19 May 2003  

Enrique J. Schroth

City University London - Cass Business School

Helios Herrera

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica

Date Written: February 25, 2003

Abstract

Investment banks develop their own innovative derivatives to underwrite corporate issues but they cannot preclude other banks from imitating them. However, during the process of underwriting an innovator can learn more than its imitators about the potential clients. Moving first puts him ahead in the learning process. Thus, he develops an information advantage and he can capture rents in equilibrium despite being imitated. In this context, innovation can arise without patent protection. Consistently with this hypothesis, case studies of recent innovations in derivatives reveal that innovators keep private some details of their deals to preserve the asymmetry of information.

Keywords: Financial innovation, first-mover advantages, asymmetric information, learning-by-doing

JEL Classification: G24, L12, L89

Suggested Citation

Schroth, Enrique J. and Herrera, Helios, Profitable Innovation Without Patent Protection: The Case of Derivatives (February 25, 2003). International Center for Financial Asset Management and Engineering Working Paper. Available at SSRN: https://ssrn.com/abstract=384822 or http://dx.doi.org/10.2139/ssrn.384822

Enrique J. Schroth (Contact Author)

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Helios Herrera

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica ( email )

Av. Camino a Santa Teresa #930
Col. Heroes de Padierna
Mexico City, D.F. 10370
Mexico
+52 55 5628 4000 (Phone)
+52 55 5628 4958 (Fax)

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