Cash Breeds Success : The Role of Financing Constraints in Patent Races

This paper studies the impact of financing constraints on the equilibrium of a patent race. We develop a model where firms finance their R&D expenditures with an investor who cannot verify their effort. We solve for the optimal financial contract of any firm along its best-response function. In equilibrium, any firm in the race is more likely to win the more cash and assets it holds prior to the race, and the less cash and assets its rivals hold prior to the race. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the effect of all the racing firms' cash holdings on the equilibrium winning probabilities. The empirical findings support our theoretical predictions.Patent Race ; optimal contract ; innovation ; financial constraints

Developer's Expertise and the Dynamics of Financial Innovation: Theory and Evidence

We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers' expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator's market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.Innovation and imitation, first-mover advantages, learning

Cash breeds Success: The Role of Financing Constraints in Patent Races

This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of winning the race the less cash-constrained he is and the more cash-constrained the entrant is. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT and fit probabilistic regressions of the predicted equilibrium winning probabilities on measures of the incumbent's and potential entrants' financial wealth. The empirical findings support our theoretical predictions.patent race; incumbent; entrant; financial constraints; empirical estimation

Profitable Innovation Without Patent Protection: The Case of Derivatives.

Investment banks find it profitable to invest in the development of innovative derivative securities even without being able to preclude early competition from other investment banks using patents. To explain this, we assume that the developer can learn from the first issues of the innovative financial product and is able to become the expert issuer by the time imitation enters the market. We show how this becomes an informational first-mover advantage that turns innovators into the market leader. It is this advantage, and not the typical temporary monopoly position awarded to a patent holder, that provides the incentive to pay the development costs. In the aftermath, the innovator ends up with the largest share of the underwriting market and makes positive profits. Our model’s predictions are consistent with many stylized facts of financial innovations by investment banks.Financial innovation; first-mover advantages; asymmetric information; learning-by-doing

The Welfare Implications of Non-Patentable Financial Innovations

Investment Banks invest in R&D to design innovative securities even when imitation is possible, i.e., when innovations cannot be patented. We show how a financial institution can profit from the development of financial products even if they are unpatentable. For certain types of financial products innovating investment banks have an information advantage over imitators. This information advantage makes them better competitors and market leaders. The mere possibility of costless imitation drives innovators’ profits down, but still keeps them positive. The absence of patents allows part of the surplus generated by the innovation to be allocated to investors. The extent of surplus sharing depends on the degree of asymmetry in the information owned by imitators and innovators and on the total number of innovators. The larger this asymmetry, the higher the innovator’s profits and the lower the investor’s surplus. With more than one innovator all the surplus goes to investors.Financial innovation, imperfect imitation, patents

Developer's Expertise and Dynamicsof Financial Innovation: Theory and Evidence

We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers’ expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator’s market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model.Innovation and imitation, first-mover advantages, product differentiation, learning

Profitable Innovation Without Patent Protection: The Case of Derivatives

Investment banks develop their own innovative derivatives to underwrite corporate issues but they cannot preclude other banks from imitating them. However, during the process of underwriting an innovator can learn more than its imitators about the potential clients. Moving first puts him ahead in the learning process. Thus, he develops an information advantage and he can capture rents in equilibrium despite being imitated. In this context, innovation can arise without patent protection. Consistently with this hypothesis, case studies of recent innovations in derivatives reveal that innovators keep private some details of their deals to preserve the asymmetry of information.Financial innovation, first-mover advantages, asymmetric information, learning-by-doing

La pobreza en América Latina: perspectivas y marco global de políticas

Aprovechando el renovado interés en círculos académicos e internacionales sobre el tema de la pobreza, este artículo pretende tanto llamar la atención sobre la evolución probable de esta última en América Latina como reseñar las principales conclusiones en materia de políticas contra la pobreza a que se llegó en el Proyecto Interinstitucional de Pobreza Critica en América Latina, de la CEPAL. El objetivo básico del autor es contribuir a la toma de conciencia de que la gravedad del problema de la pobreza no es, como muchas veces se ha sostenido, una muestra del fracaso de años de dedicación a su análisis, sino más bien un indicador de la necesidad inescapable de seguir consagrando recursos y esfuerzos a su estudio y combate.Profitting from renewed interest in academia and international circles on the subject of poverty, this article pretends both to call the attention on the probable evolution of poverty in Latin America as well as to outline the principal conclusions relevant to antipoverty policy design developed in the Interinstitucional Profect on Critical Poverty in Latin America, of ECLAC. The author's basic aim is to contribute towards the realization that the present seriousness of the problem of poverty is not, as has often been held, a measure of the failure of years of dedication to its analysis, but rather an indicator of the inescapable need to continue devoting resources and efforts to its study and combat

Innovation and First-Mover Advantages in Corporate Underwriting: Evidence from Equity Linked Securities

Investment banks develop new securities permanently even when their competitors can imitate them almost immediately and at significantly smaller development costs. Using data of all the new issues of Equity Linked and Derivative Securities since 1985 compiled by SDC, and firm financial data from COMPUSTAT, I test if innovators have a demand advantage over the imitators when they compete to underwrite new issues using innovative corporate products. If the innovator has private information about the innovation, his own variety of the security may be better valued than the imitators’ varieties by the issuers. I estimate the issuers’ demand for the banker’s underwriting service across different varieties of equity-linked securities. Using a nested-logit model of discrete choice I find that, ceteris paribus, the demand for innovators’ varieties is larger than for imitators’. I also find that this demand advantage is decreasing in time, suggesting that imitators learn from observing deals made in the past by the innovator and by themselves. The initial innovator’s advantage is larger for securities that appear later in a sequence of innovations but it diminishes faster.Financial Innovation; Investment Banking; Underwriting; First-Mover Advanatges; Demand Estimation

Cash breeds success : the role of financing constraints in patent races

This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of winning the race the less cash-constrained he is and the more cash-constrained the entrant is. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the effect of the incumbent's and entrants' cash holdings on the equilibrium winning probabilities. The empirical findings support our theoretical predictions