The Impact of Uncertain Intellectual Property Rights on the Market for Ideas: Evidence from Patent Grant Delays

• Published in: Management science Vol. 54; no. 5; pp. 982 - 997
• Main Authors: Gans, Joshua S, Hsu, David H, Stern, Scott
• Format: Journal Article
• Language: English
• Published: Linthicum, MD INFORMS 01.05.2008; Institute for Operations Research and the Management Sciences
• Series: Management Science
• Subjects: Applied sciences; Appropriation; Asymmetric information; Business innovation; Business studies; Commercialization; Cooperation; Copyright; Economics; Entrepreneurs; entrepreneurship; Evaluation; Exact sciences and technology; Firm modelling; General aspects; Grants; Influence; Information technology; Innovation; Intellectual property; Intellectual property law; Intellectual property rights; Interpretation and construction; Licences; Licensed products; Licenses; Licensing; Life cycles; Management science; Methods; Operational research and scientific management; Operational research. Management science; Patent applications; Patent licenses; Patent licensing; Property rights; Regression analysis; Start up firms; Studies; Technological innovation; Technology transfer; U.S.A; Uncertainty; United States; Patents; Marketing; Life cycle; Innovation; Uncertain system; Asymmetry; Firm environment; Cooperation; Entrepreneurship; Technology transfer; Starting; Intellectual property; Defect; commercialization; Patent rights; Reputation; Timing; Hazard; licensing
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.1070.0814

This paper considers the impact of the intellectual property (IP) system on the timing of cooperation/licensing by start-up technology entrepreneurs. If the market for technology licenses is efficient, the timing of licensing is independent of whether IP has already been granted. In contrast, the need to disclose complementary (yet unprotected) knowledge, asymmetric information or search costs may retard efficient technology transfer. In these cases, reductions in uncertainty surrounding the scope and extent of IP rights may facilitate trade in the market for ideas. We employ a data set combining information about cooperative licensing and the timing of patent allowances (the administrative event when patent rights are clarified). Although preallowance licensing does occur, the hazard rate for achieving a cooperative licensing agreement significantly increases after patent allowance. Moreover, the impact of the patent system depends on the strategic and institutional environment in which firms operate. Patent allowance plays a particularly important role for technologies with longer technology life cycles or that lack alternative appropriation mechanisms such as copyright, reputation, or brokers. The findings suggest that imperfections in the market for ideas may be important, and that formal IP rights may facilitate gains from technological trade.