Knowledge Disclosure, Patents and Optimal Organization of Research and Development

1. Knowledge Disclosure, Patents and Optimal Organization of Research and Development Discussion: Alan Morrison Saïd Business School, University of Oxford and CEPR Sudipto Bhattacharya Sergei Guriev

2. Motivation • The agents who create ideas are frequently independent of the agents who develop them • It is impossible to sell knowledge without leaking it • What are the implications of this statement for • The best way to sell information • The best way to structure the research and development units

3. DU1, DU2: effort E 0.5 RU: effort e Interim Ex post Ex ante Knowledge K Distn Fn G(K,e) P{Invention} = P(K,E)= Bertrand Compete: Payout 1 iff sole inventor Interim Sale of K Open sales: Patent K to one party Knowledge LK disclosed to both parties Closed sales: For lump sum + shares s Bilateral Rubinstein-style bargaining Outside option for both parties is open sale 1. Disclose the nature of K and let LK go at the same time 2. Bargain for K … Then decide whether to sell to other DU. This is unobservable: use s to render it incentive incompatible Model

4. 1 Closed Open Sales Open Other DU more likely to Succeed  less effort Interim E{surplus} dropping Closed sales increasingly attractive K=knowledge Closed Sales Opportunistic sale less attractive  lower s  higher effort RU royalties dropping Interim E{surplus} increasing Low K: closed sales incentive infeasible 0 L = leakage 0 1 STRONG IPR PROTECTION WEAK IPR PROTECTION DU get reservation utility  increasing utility More ex post competition  lower devt. effort from licensee Interim E{surplus} dropping Open Sales Opportunistic sales less attractive  lower s, higher devt. effort Interim E{surplus} increasing Closed Sales Incentive Effects at Interim Date

5. 1 K=knowledge 0 L = leakage 0 1 STRONG IPR PROTECTION WEAK IPR PROTECTION Overall R&D Expenditures Closed Open • In open region, L4 implies • expenditure could be • increasing • Moving from O to C causes a • drop in expenditure: could • cancel closed sales effect • For appropriate distn on K this • happens … Inverted U shape Lower development effort from licensee Higher development effort from non-licensee Open Sales Lemma 4: Total either increasing or U-shaped Closed Sales Higher development effort

6. Ex Ante Structuring • First best may violate RU budget constraint in closed sale case • Could bring in a VC partner • VC buys some of the shares in the development project • Further disclosure by RU IC, but harms VC/RU coalition: hence a monitoring role for the VC • But RU royalties dropping in K with closed sales • Deleterious incentive effect • Could overcome with corporate venture which prevents the introduction of a VC • For some K distns, ex ante incentive gains from venture outweight interim efficiency costs

7. Comments • This is a rich and subtle model • Some of its many predictions are rather surprising • While the paper is not a simple read, it repays perseverance and I enjoyed working through it • I had some general questions about the set-up and its interpretations

8. Questions • What in this model can be influenced by policy, and what is technological? • In the closed sale, L appears to describe technological limitations to the disclosure process • In the open sale, this may be true, but may similarly reflect the amount of information it is acceptable to steal • This has an impact for the interpretation of the inverted U: what appears on the x axis may sometimes be hard to describe as “IPR protection”

9. Questions • The use by DUj of leaked information to invent when DUi has a patent might be regarded as a breach of patent • At present breach is costly to DUi because it generates ex post competition • Its interesting in this case to think about whether there should be a role for the courts: strength of IPR then has something to do with ex post enforcement

10. Questions • Is this really what the VC does? • In general, we expect the VC to have something to do with selecting managers and monitoring them while they are actually working • I like the fact that the model can explain the inverted U-shape in terms of modes of sale. It would be interesting to read some speculation as to the effects of all of this upon consumers, so that a more complete picture of welfare could emerge, and with it some policy suggestions