Signaling role of patenting decisions

This thesis analyzes a strategic environment in which firms compete under simultaneous innovation and choose between filing a patent and relying on secrecy to protect their intellectual property. We build a theoretical model in which an inventor is essential to production and the inventor's ability is the key determinant of his or her productivity. Under full information, in which firms observe each other's innovation output and the inventor's ability, they opt for patenting and there is turnover only when the inventor has low ability. Incorporating informational asymmetry when firms have simultaneous innovation with certainty leads to an equilibrium in which the incumbent has incentives to distort optimal patent filing decision. The incumbent firm does not file a patent to avoid losing the inventor to the competitor and paying higher retention wages, whereas the competitor is granted a patent but cannot transfer knowledge. Our results indicate that under asymmetric information firms are more likely to patent their innovation under strong property rights, weaker rivalry, and higher monopoly profit. By contrast, higher ability difference between the inventor types is more important on turnover and choosing secrecy as the protection mechanism. When simultaneous innovation is possible but not definite, we find a threshold of simultaneous innovation probability over which firms choose to file a patent. This threshold increases with stronger property rights, higher monopoly profits and lower duopoly profits. Also, assuming a 0.5 ratio between duopoly and monopoly profits, we show that firms file a patent when simultaneous innovation occurs at a rate that is higher than the lost profit due to revealing information with patents.