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


Bechtold, S; Hoffler, F (2011). An economic analysis of trade-secret protection in buyer-seller relationships. Journal of Law, Economics, & Organization, 27(1):137-158.

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 a 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 trade-secret protection in such cases. Frequently, asymmetric information will lead 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 the optimal fine for violations of trade secrets is positive. In general, however, the welfare effects of increasing a fine are ambiguous. We discuss conditioning the legal protection on a minimum investment by the informed party to conceal the information and argue that this helps to apply trade-secret protection only when it increases welfare. This rationalizes important features of current legal practice

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 a 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 trade-secret protection in such cases. Frequently, asymmetric information will lead 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 the optimal fine for violations of trade secrets is positive. In general, however, the welfare effects of increasing a fine are ambiguous. We discuss conditioning the legal protection on a minimum investment by the informed party to conceal the information and argue that this helps to apply trade-secret protection only when it increases welfare. This rationalizes important features of current legal practice

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:National licences > 142-005
Dewey Decimal Classification:320 Political science
Scopus Subject Areas:Social Sciences & Humanities > Economics and Econometrics
Social Sciences & Humanities > Organizational Behavior and Human Resource Management
Social Sciences & Humanities > Law
Language:English
Date:1 April 2011
Deposited On:24 Oct 2018 15:52
Last Modified:15 Apr 2021 14:48
Publisher:Oxford University Press
ISSN:8756-6222
OA Status:Green
Publisher DOI:https://doi.org/10.1093/jleo/ewp020

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