Patents as Credence Goods

Abstract

The view of patents as well defined property rights is as simplistic as it is ubiquitous. This paper argues that in newly arising or immature technologies, patents are subject to intrinsic and extrinsic uncertainty that make them very opaque representations of the underlying inventions. The opacity is a result of unsettled legal doctrine and scientific terminology, uncertain commercial and technological prognosis, and leads to considerable ambiguity in property parameters. Patents in immature technologies do not solve Arrow’s information paradox of non-rivalrous goods because they do not represent the sharp exclusive right that is central to his thesis. In such cases patents ought to be reclassified in terms of their perceived and actual function as credence goods. The difficulty in discovering the value of these patents necessitates credence verifiers, further increasing the transaction costs of encouraging innovation. The theoretical and empirical implications of credence explored in this paper are based primarily on the Anglo-American legal protection of biotechnological inventions, but may equally be relevant to patents in other newly arising technologies.