Efficient Rewards for Innovation: Patents and Secrets
This paper provides a comparison of patents and trade secrets as alternative ways of protecting innovative knowledge. Our results suggest that trade secret protection is socially preferable for those innovations that fail a modified version of Kaplow's "Ratio Test," and namely for those innovations that:
i) are the outcome of races with low R&D expenditures, and
ii) are sold in relatively competitive markets.
Trade secret protection is thus likely to be an efficient protection tool for marginal innovations in competitive industries.