Patenting and Licensing of Financial Innovations

46 Pages Posted: 18 Jul 2006

See all articles by Praveen Kumar

Praveen Kumar

University of Houston - Department of Finance

Stuart M. Turnbull

University of Houston - C.T. Bauer College of Business

Date Written: July 2006

Abstract

Recent court decisions, starting with the State Street decision in 1998, allow business methods to be patentable and now give financial institutions the option to seek patent protection for financial innovations. We develop a dynamic model that incorporates salient aspects of the adoption and dissemination of financial innovations. We find, somewhat surprisingly, that patent protection may be detrimental to long-term profits because of embedded real options for further innovations and market expansion that are especially important for financial firms. Moreover, a strategy of patenting and then licensing may not be effective because of expertise-related constraints of the licensees. Our framework helps understand the success of a wide class of innovations including swaps, credit derivatives, and pricing algorithms; it also helps financial institutions decide whether it is optimal to exercise the patentability and licensing option.

Keywords: Business Methods, Financial Innovations, Patents, Licenses, Real Options

JEL Classification: G20, L10, O31

Suggested Citation

Kumar, Praveen and Turnbull, Stuart M., Patenting and Licensing of Financial Innovations (July 2006). Available at SSRN: https://ssrn.com/abstract=917874 or http://dx.doi.org/10.2139/ssrn.917874

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Stuart M. Turnbull

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

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