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From Thought to Practice: Appropriation and Endogenous Market Structure with Imperfect Intellectual Property Rights

We address the problem faced by innovators who have an idea for a marketable product but must hire employees to bring the product to the market. Information leakage implies that newly-hired employees become informed of the idea and may attempt to bring the product to the market themselves. We develop a bargaining model that accounts for this problem. In this model, employee’s rents endogenously reflect the bargaining power vis-a-vis the firm that is due to the knowledge of the information. The model has a unique symmetric equilibrium in which the innovator appropriates a sizable share of the surplus despite the absence of property rights for ideas. We show that this share stays bounded away from zero even as the number of agents required in the development grows to infinity. We also derive the conditions under which monopoly or competition arise on the product market. We find that when the degree of potential competition on the product market is high enough, a monopoly is generated by hiring all potential competitors within the same firm. Finally, the link between intellectual property rights enforcement and industry performance is explored, and normative implications are derived.