We use exogenous variation in the strength of trade secrets protection to show that a relative weakening of patents (compared to trade secrets) has a disproportionately negative effect on the disclosure of processes – inventions that are not otherwise visible to society. We develop a structural model of initial and follow-on innovation to determine the effects of such a shift in disclosure on overall welfare in industries characterized by cumulative innovation. We find that while stronger trade secrets encourage investment in R&D, they may have negative eects on overall welfare – the result of a significant decline in follow-on innovation.
Ganglmair, Bernhard and Imke Reimers (2019), Visibility of Technology and Cumulative Innovation: Evidence from Trade Secrets Laws, ZEW Discussion Paper No. 19-035, Mannheim. Download