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Attracting Skeptical Buyers

James J. Anton and Dennis A. Yao

International Economic Review, Vol. 49(1):319-348, February 2008

Abstract: An obstacle to the sale of intellectual property (IP) is that an expropriable partial disclosure of that knowledge to prospective buyers may be necessary to facilitate the sale. Such disclosures can, of course, be protected in principle through a confidentiality contract which gives the seller the right to sue for unauthorized use of the disclosed information and is negotiated prior to substantive knowledge exchanges. Yet we frequently observe in practice that sellers waive their rights to confidentiality. In this paper we provide an incomplete information explanation for why a seller will sometimes waive confidentiality even when confidentiality would have been maintained under complete information. To the seller, the decision to waive rights involves giving up the value associated with a confidentiality right in exchange for an increase in buyer participation. Our analysis incorporates an endogenous interaction among three critical elements—the underlying sources of buyer skepticism—which affect buyer participation: uncertainty about the value of the IP being offered, valuedissipating effects of competition for the knowledge, and costs associated with ex post lawsuits claiming expropriation. (JEL D23, D82, L14)

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