The Welfare Implications of Non-Patentable Financial Innovations

FAME Research Paper No. 82

43 Pages Posted: 15 Jul 2003

See all articles by Helios Herrera

Helios Herrera

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

Enrique J. Schroth

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Date Written: March 2001

Abstract

Investment Banks invest in R&D to design innovative securities even when imitation is possible, i.e., when innovations cannot be patented. We show how a financial institution can profit from the development of financial products even if they are unpatentable. For certain types of financial products innovating investment banks have an information advantage over imitators. This information advantage makes them better competitors and market leaders. The mere possibility of costless imitation drives innovators' profits down, but still keeps them positive. The absence of patents allows part of the surplus generated by the innovation to be allocated to investors. The extent of surplus sharing depends on the degree of asymmetry in the information owned by imitators and innovators and on the total number of innovators. The larger this asymmetry, the higher the innovator's profits and the lower the investor's surplus. With more than one innovator all the surplus goes to investors.

Keywords: Financial innovation, imperfect imitation, patents

JEL Classification: G24, L12, K20

Suggested Citation

Herrera, Helios and Schroth, Enrique J., The Welfare Implications of Non-Patentable Financial Innovations (March 2001). FAME Research Paper No. 82, Available at SSRN: https://ssrn.com/abstract=411905 or http://dx.doi.org/10.2139/ssrn.411905

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)

Enrique J. Schroth (Contact Author)

EDHEC Business School ( email )

393, Promenade Des Anglais
Nice, 06202
France
+33493186939 (Phone)

HOME PAGE: http://https://www.edhec.edu/en/faculty-and-researchers/schroth-enrique-phd

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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