Profitable Innovation Without Patent Protection: The Case of Derivatives

Helios Herrera () and Enrique Schroth ()

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: 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.

Keywords: Financial innovation; first-mover advantages; asymmetric information; learning-by-doing (search for similar items in EconPapers)
JEL-codes: G24 L12 L89 (search for similar items in EconPapers)
Date: 2003-01
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Citations: View citations in EconPapers (10)

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Working Paper: Profitable Innovation Without Patent Protection: The Case of Derivatives (2003)
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