Working Paper: CEPR ID: DP9212
Authors: Giacomo A. M. Ponzetto
Abstract: I provide a justification of intellectual property rights as a source of static efficiency gains in manufacturing, rather than dynamic benefits from greater innovation. I develop a property-rights model of a supply relationship with two dimensions of non- contractible investment. In equilibrium, the first best is attained if and only if ownership of tangible and intangible assets is equally protected. If IP rights are weaker, the organization of the firm is distorted and efficiency declines: the final producer must either integrate her suppliers, which prompts a decline in their investment; or else risk their defection, which entails a waste of her expertise. My model predicts a greater prevalence of vertically integrated manufacturers where IP rights are weaker, and a switch from integration to outsourcing over the product cycle. Empirical evidence on the international supply chains of multinational companies bears out both predictions. As a normative implication, I find that IP rights should be strong but narrowly defined, to protect a business without holding up non-competing derivative innovations.
Keywords: Holdup problem; Intellectual property; Licensing; Organization; Outsourcing; Product cycle; Property rights; Spinoff; Vertical integration
JEL Codes: D23; D86; K11; L22; L24; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Strong IP rights (O34) | Efficient firm organization (D21) |
| Weak IP rights (O34) | Increased vertical integration (L22) |
| Increased vertical integration (L22) | Decrease in overall efficiency (D61) |
| Strong IP rights (O34) | Stable outsourcing relationship (L14) |
| Efficient production (L23) | Engagement in outsourcing (L24) |
| Mature products (Y90) | Shift from vertical integration to outsourcing (L24) |
| Robust IP system (P14) | Enhanced efficiency of existing operations (O49) |
| Robust IP system (P14) | Increased value of intangible assets (O34) |
| Increased value of intangible assets (O34) | Better organizational structures (L22) |