When do patents encourage disclosure?

Joshua Gans and Scott Stern

London Business School
October 2010
New knowledge New
produced applications
 New
applications
New knowledge Newer
produced applications

Future
knowledge
productivity
 Disclosures assist future knowledge productivity

... which is essential for cumulative growth

... but generates competition for existing products.

Not only is there an inter-temporal spillover from

disclosures

... but there is an incentive to keep knowledge secret.

"The owner of a design has property rights over it's use
in the production of a new producer durable but not
over its use in research. If an inventor has a patented
design for widgets, no one can make or sell widgets
without the agreement of the inventor. On the other
hand, other inventors are free to spend time studying
the patent application for he widget and learn
knowledge that helps in the design of a wodget. The
inventor of the widget has no ability to stop the inventor
of a wodget from learning from the design of a
widget." (Romer 1990)
"The patent constitutes a genuine contract between
society grants him a temporary guaranty, he discloses
the secret which he could have guarded: quid pro quo,
this is the very principle of equity." (Louis Wolowski,
1869)
 Patents and disclosure
Patent Secret
Probability Private
Pr(d) Pr(0)
of entry Returns

Social Less More Social

consequences competition duplication Returns
Patents and disclosure

Social
Returns

Private Pr(0)
Returns = Pr(d)

Disclosure
How do you license without
patent protection?
Licensing and disclosure

Start-up licenses to an incumbent

Incumbent can enter without license

But value depends on disclosure

Gains from
V(d)(1 - Pr(d))
trade

Tacit disclosures higher with stronger patents if

Pr(d) - Pr(0) is decreasing in patent strength
Licensing and disclosure

Social
Returns

Private
Returns

Disclosure
Licensing and disclosure

Social
Returns

Private
Returns

Disclosure
Increased patent rights led to greater licensing
Gans, Hsu & Stern (2002)
Gans, Hsu & Stern (2008)
Patents and scientific disclosure

• Academics funded by commercial funders

• Debate about whether patents will decrease open science

• Empirical evidence that patents and patents pairs

• What does theory say?

• Model bargaining between scientist and firm over

disclosure strategy
Disclosure regimes
Publish
No Yes

Yes Commercial Patent-Paper

Science Pairs

Patent

No Secrecy Open Science

Bargaining

• Scientist cares about publications and money

• Firm cares about profits and disclosures (both published

and patent) increase competition

• Patent and publication disclosures may overlap

• Scientist can't pay the firm

Equilibrium regimes

Commerci
al Science Patent-Paper
Pairs
• Congruence Returns
• Protection to
• Participation Patenting
Secrecy
Open
Science

Returns to Disclosure
Conclusions

• Discord between social and private returns to patenting

because firms are concerned about required disclosures

• Patents can block entry and the consequences of

disclosure

• Patents facilitate cooperative commercialisation

• Patents can stimulate academic publishing