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

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

Model RU: effort e Ex ante Knowledge K Distn Fn G(K,e) InterimEx post DU 1, DU 2 : effort E  0.5 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

Incentive Effects at Interim Date Open Sales DU get reservation utility  increasing utility More ex post competition  lower devt. effort from licensee Interim E{surplus} dropping Closed Sales Opportunistic sales less attractive  lower s, higher devt. effort Interim E{surplus} increasing STRONG IPR PROTECTION L = leakage 01 WEAK IPR PROTECTION K=knowledge 0 1 Open Sales Other DU more likely to Succeed  less effort Interim E{surplus} dropping Closed Sales Opportunistic sale less attractive  lower s  higher effort RU royalties dropping Interim E{surplus} increasing Low K: closed sales incentive infeasible Closed sales increasingly attractive Open Closed

Overall R&D Expenditures STRONG IPR PROTECTION L = leakage 01 WEAK IPR PROTECTION K=knowledge 0 1 Open Closed Open Sales Lower development effort from licensee Higher development effort from non-licensee Closed Sales Higher development effort Lemma 4: Total either increasing or U-shaped 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

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

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

Questions 1.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”

Questions 2.The use by DU j of leaked information to invent when DU i has a patent might be regarded as a breach of patent At present breach is costly to DU i 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

Questions 3.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 4.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