Max Planck Institute for Innovation and Competition, Munich, Room 313
By issuing patents, society grants an inventor temporary monopoly rights in exchange for the disclosure of the patented invention. If, however, what is patented is otherwise already visible to society, and what is otherwise not visible is kept secret by the inventor, then the bargain fails. We use exogenous variation in the strength of trade secrets protection from the Uniform Trade Secrets Act to show that patenting of processes is more adversely affected than that of products when patenting becomes relatively less attractive (compared to trade secrets). Arguing that processes are on average less visible (or self-disclosing) than products, stronger trade secrets have thus a disproportionately negative effect on the disclosure of inventions that are not otherwise visible to society. We then develop a structural model of initial and follow-on innovation to determine the impacts of such a shift in disclosure on overall welfare in industries characterized by cumulative innovation. In counterfactual analyses, we find that while stronger trade secrets encourage more investment in R&D, they may have negative effects on overall welfare - the result of a significant decline in follow-on innovation. This is especially the case in industries with relatively profitable R&D.
Contact: Fabian Gaessler