The Right to Exclude: Property Rights and Frictions in the Sale of Patents

(Kuhn 2016, working paper)

Patent scope is central to the sale of ideas, which can spur economic growth and provide significant gains from trade. Awarding an inventor a patent on a new idea partially solves a commitment problem that would otherwise prevent the inventor from selling the idea. (Arrow, 1962). In the absence of a patent, a prospective buyer cannot credibly promise not to steal the idea should the inventor reveal it, while the inventor cannot credibly promise to reveal the idea should the prospective buyer pay for it. A firm’s ability to use a particular patent to overcome this transactional hurdle derives from two factors: (1) the scope of the patent’s legal right to exclude and (2) the effectiveness of that legal right in providing market exclusivity.

I first show that a broader patent is more likely to be sold by employing a causal instrument that provides a plausibly exogenous shock to the scope of a patent’s legal right to exclude, holding fixed the underlying idea. I then examine variation in the effectiveness of the right by interacting the instrument with endogenous firm, industry, and market characteristics. These results shed light on how firms profit from innovation and also connect the important but understudied market for patents, widely believed to be illiquid and inefficient, with fundamental research about how markets function in other contexts.