Information Leakage, Intellectual Property Rights and the Incentives to Innovate

New York University, New York NY

Investigators

Abstract

The theoretical literature in economics assumes that intellectual property rights can be perfectly enforced. In reality this is far from the case. The central aim of this project is to provide a theoretical foundation for understanding the impact of intellectual property rights when enforcement is imperfect. To this end, the project first introduces a theoretical framework with which one can analyze the formation of new firms in the absence of property rights. In particular, two main issues are addressed. First, the project investigates the ability of innovators to appropriate economic rents from the fruits of their ideas. The study shows that, even in the absence of intellectual property rights, this can be achieved by equilibrium effects in an industry. Second, the study will follow the (endogenous) flow of information in an industry and analyze the implications of these flows on the generation of new products, the market structure of new industries and on differences between different industry configurations (a motivating example being the differences between Silicon Valley and Route 128 industry configurations). Finally, the study will analyze the effects of different legal property rights regimes on the incentives to innovate and on the market configurations. The Law and Economics literature are both in desperate need for theoretical foundations to understand the economics of innovation under imperfect property rights protection. This gap in the literature has persisted for some years for several reasons. First, it was believed for many years that empirically it would be very hard to gather and analyze data relating to issues of information diffusion and its affects on industries. This poverty of empirical analysis deemed any theoretical investigation of these issues as futile. After all, empirical and theoretical analysis are complementary goods; one can not progress in one without a progress in the other. Lately, due to advances in statistical estimation, availability of new data and the importance of information in high-tech industries, there is a surge in empirical research on this topic. This brings about the importance of having a robust and tractable theoretical understanding of the economics of innovation and the diffusion of information in industries. This is the main aim of this study. What can be concluded from the experience of the high-tech industries in the last two to three decades? What impact did different Intellectual Property Rights regimes, employed in different states and countries have on the observed outcomes? Can we learn something about how to design new legal regimes that would enhance innovation and growth? These are the questions that are central to this research. This study will provide building blocks that together with empirical investigation will allow to answer these questions. Ultimately, this proposal offers a framework for understanding the policy implications of different intellectual property rights regimes for innovation and diffusion.