Recent Research: Working Paper Asks: To Patent or Not to Patent?

That is the question facing researchers who have innovative ideas that become marketable products. Researchers who file patents to protect intellectual property rights may diminish the value of the research to potential developers due to "knowledge leakage" to competing developers. Instead, a researcher might approach a developer directly to negotiate an exclusive contract in which a researcher receives some immediate compensation and a stake in the licensed, developed product.

Sudipto Bhattacharya of London School of Economics and Sergei Guriev of the New Economic School of Moscow address these two situations in their paper Knowledge Disclosure, Patents, and Optimal Organization of Research and Development. Based on Bhattacharya and Guriev's theories, researchers with venture capital partners may produce deals that result in greater amounts of knowledge development leading to marketable products than those that go it alone.

Using economic equations and game theory, Bhattacharya and Guriev found the preferred disclosure mode for the involved parties depended upon the nature of the research and the amount of knowledge leakage. They conclude that both parties would choose a closed sale if the research is deemed highly valuable and intellectual property rights are not well protected. If the risk of knowledge leakage remains low, researchers prefer open sales creating a variable relationship between the strength of intellectual property rights and aggregate R&D expenditures. The authors suggest that intellectual property rights reach a threshold where the closed mode is irrelevant and R&D investment declines as property rights increase.

Bhattacharya and Guriev also examine how researchers might attempt to develop their own marketable product or strengthen their bargaining position by lining up venture capital. The economists found that despite reducing the researcher's flexibility and creating inefficiencies, venture capital may enhance knowledge creation and improve the chances a researcher will pursue development of a marketable product.

From a policy perspective, a closed sale mitigates knowledge sharing (i.e. leakage) and creates a disincentive for the developer to pursue a marketable product due to shared profits with the researcher. However, the open mode creates disincentives for developers due to knowledge leakage. Based on the theories of Bhattacharya and Guriev, enhancing the access of researchers to venture capital might produce the greatest public good -- more development of knowledge and market-ready products.

Knowledge Disclosure, Patents, and Optimal Organization of Research and Development is available at: http://sticerd.lse.ac.uk/dps/te/TE478.pdf