DP4513 Knowledge Disclosure, Patents and Optimal Organization of Research and Development

Author(s): Sudipto Bhattacharya, Sergei Guriev
Publication Date: August 2004
Keyword(s): corporate venturing, patents, research and development, sequantial innovation
JEL(s): D23, O32, O34
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4513

We develop a model of two-stage cumulative research and development (R&D), in which one Research Unit (RU) with an innovative idea bargains to license her non-verifiable interim knowledge exclusively to one of two competing Development Units (DUs) via one of two alternative modes: an open sale after patenting this interim knowledge, or a closed sale in which precluding further disclosure to a competing DU requires the RU to hold a stake in the licensed DU’s post-invention revenues. Both modes lead to partial leakage of the RU’s knowledge from its description, to the licensed DU alone in a closed sale, and to both DUs in an open sale. We find that higher levels of interim knowledge are more likely to be licensed via closed sales. If the extent of leakage is lower, more RUs choose open sales, generating a non-monotonic relationship between the strength of Intellectual Property Rights (IPR) and aggregate R&D expenditures. We also develop a rationale for the ex ante acquisition of control rights over the RU by a DU, rooted in the RU’s incentives to create knowledge under alternative modes of sale thereof, and her wealth constraint in ex interim bargaining.