The Impact of Uncertain Intellectual Property Rights on the Market for Ideas: Evidence from Patent Grant Delays

This paper considers the impact of the intellectual property (IP) system on the timing of cooperation/licensing by start-up technology entrepreneurs. If the market for technology licenses is efficient, the timing of licensing is independent of the patent grant date, and productive efficiency considerations will result in licensing as early as possible after invention. In contrast, the need for disclosure of unprotected knowledge on the part of the inventor, asymmetric information between the licensor and potential licensees, or search costs may retard efficient technology transfer. In these cases, the actual grant of a patent may facilitate trade in the market for ideas by establishing the scope of IP rights. Employing a dataset which combines information about the timing of patent grants and cooperative licensing, we find that pre-grant licensing is quite common, occurring in about 40% of our sample; moreover, the hazard rate for achieving a cooperative licensing agreement increases significantly with the granting of formal IP rights. Finally, the importance of a patent grant for licensing depends on the strategic environment in which the firm operates. When productive efficiency effects are important (as when technology cycle times are short), or when alternative mechanisms such as reputation may serve to mitigate expropriation concerns or reduce search costs, patent grants are not as important. The findings suggest that imperfections in the market for ideas may be important, and that formal IP rights may facilitate gains from technological trade.