Working Paper: CEPR ID: DP8392
Authors: Simona Fabrizi; Steffen Lippert; Pehr-Johan Norbäck; Lars Persson
Abstract: We analyze incentives to develop entrepreneurial ideas for venture capitalists (VCs) and incumbent firms. If VCs are sufficiently better at judging an idea's value and if it is sufficiently more costly to patent low than high value ideas, VCs acquire valuable ideas, develop them beyond the level incumbents would have chosen, and use patents to signal their companies' high value to acquirers prior to exiting. This increases the VC-backed companies' patenting intensity and long-run performance, but also inflates their acquisition prices, and lowers their acquirers' overall profits. Patent law usefulness clauses would reduce such excessive, signaling-driven investment and patenting intensity.
Keywords: innovation; patent law; patenting intensity; preemptive vs late acquisition strategies; signaling; usefulness requirement; venture capital
JEL Codes: C70; D21; D82; G24; L26; M13; O31; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| VC assessment capabilities (C52) | patenting intensity (O34) |
| VC assessment capabilities (C52) | long-run performance for VC-backed firms (L25) |
| patenting intensity (O34) | long-run performance for VC-backed firms (L25) |
| stricter usefulness clauses in patent law (D45) | VC investment intensity (G31) |
| stricter usefulness clauses in patent law (D45) | patenting levels (O34) |
| stricter usefulness clauses in patent law (D45) | long-run performance advantages of VC-backed firms (L25) |
| stricter usefulness clauses in patent law (D45) | stock market reaction to VC-backed acquisitions (G34) |