Intellectual Property Rights and Efficient Firm Organization

33 Pages Posted: 1 Feb 2013

Date Written: November 2012

Abstract

This paper shows that intellectual property rights yield static efficiency gains, irrespective of their dynamic role in fostering innovation. I develop a property-rights model of firm organization with two dimensions of non-contractible investment: how much cost-minimizing effort to exert, and whether to direct it towards partnership or defection. In equilibrium, the first best can be attained if and only if property rights are as strong for intangible as for tangible assets. When IP rights are weaker, the structure of the firm is distorted and efficiency declines. An entrepreneur must either integrate her suppliers, which induces a fall in their investment; or else risk their defection, which entails a waste of her human capital. My model predicts greater prevalence of vertical integration in response to weaker IP rights. It also predicts a switch from integration to outsourcing over the product cycle. Both empirical predictions are consistent with evidence on the organization of multinational companies. As a normative implication, I find that IP rights should be strong but narrowly defined, to protect one business opportunity without holding up its potential spin-offs.

Keywords: Hold-up problem, Intellectual property, Licensing, Organization, Outsourcing, Product cycle, Property rights, Spin-off, Vertical integration

JEL Classification: D23, D86, K11, L22, L24, O34

Suggested Citation

Ponzetto, Giacomo A. M., Intellectual Property Rights and Efficient Firm Organization (November 2012). CEPR Discussion Paper No. DP9212, Available at SSRN: https://ssrn.com/abstract=2210161

Giacomo A. M. Ponzetto (Contact Author)

CREI - Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2829 (Phone)
+34 93 542 2826 (Fax)

HOME PAGE: http://www.crei.cat/people/ponzetto

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