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
Date Written: February 25, 2003
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: Suggested Citation