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  An economic analysis of trade-secret protection in buyer-seller relationships

Bechtold, S., & Höffler, F. (2007). An economic analysis of trade-secret protection in buyer-seller relationships.

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 Creators:
Bechtold, Stefan1, Author              
Höffler, Felix1, Author              
Affiliations:
1Max Planck Institute for Research on Collective Goods, Max Planck Society, ou_2173688              

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Free keywords: K2, D82 disclosure of information, hold-up problems, trade secrets
 Abstract: The economic analysis of trade-secret protection has traditionally focused on the interests of companies to conceal information from competitors in order to gain competitive advantage through trade-secret law. This has neglected cases in which the interest is not in concealing information from competitors, but from trading partners. We investigate the social efficiency effects of trade-secret protection in such cases. Many results from economic theory state that asymmetric information (and therefore also its legal protection) is socially undesirable since it leads to inefficient trade. At the same time, protecting private information might create incentives for socially desirable investments. We model this trade-off in a simple buyer-seller model and find that, indeed, trade-secret protection has ambiguous welfare effects. However, a simple, informationally undemanding rule, conditioning the applicability of legal protection on a minimum investment by the informed party to conceal the information, helps to apply trade-secret protection only when it increases welfare. This rationalizes important features of current legal practice, but suggests that the effort to conceal rather than the effort to reveal the information should play a role when deciding whether or not trade secret protection should be granted.

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 Dates: 2007
 Publication Status: Published in print
 Pages: 26
 Publishing info: Bonn : Max Planck Institute for Research on Collective Goods
 Table of Contents: -
 Rev. Type: -
 Identifiers: Other: 2007/18
 Degree: -

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