Cumulative Innovation, Experimentation and the Hold-Up Problem

Extending the basic model of two-stage cumulative innovation with asymmetric information to include `experimentation' by second-stage rms, we nd that the costs of a strong (versus weak) intellectual property (IP) regime may be substantially increased. In addition, these costs increase as experimentation becomes cheaper and as the differential between high and low value second-stage innovations grows, with the result that a weak IP regime is more likely to be optimal. Thus, technological change which reduces the cost of encountering and trialling new `ideas' implies a reduction in the socially optimal level of IP rights such as patent and copyright.