Intellectual Property Rights and Efficient Firm Organization
Evidence from policy reforms has shown that a strengthening of patent protection has no significant positive impact on innovation and R&D. Are intellectual property rights justified, if not to provide incentives to innovators? I present a new rationale grounded in the theory of the firm. In a world of incomplete contracts and relationship-specific investments, the efficient organization of production is achieved by allocating property rights. If ownership of intangible assets is not sufficiently protected by the legal system, the structure of the firm is distorted: an entrepreneur must either integrate his suppliers, or risk being displaced by them. In either case efficiency falls, even if innovation is entirely exogenous. My model predicts a greater prevalence of vertical integration where intellectual property rights are weaker. It also accounts for a product cycle in which an integrated firm spins off its suppliers and achieves lower costs after learning the appropriability of its technology.