”Deep Pockets” Collateral Assignments of Patents and the Growth of Innovations

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”Deep Pockets”, Collateral Assignments of Patents, and the Growth of Innovations Bruno Amable? Jean-Bernard Chatelain† Kirsten Ralf‡ February 14, 2005 Abstract This paper studies how imperfect collateral assignments of patents contribute to ”deep pockets” savings of innovative firms facing random investment oppor- tunities in Research and Development (R&D) and determine the growth of their innovations, using a version of the Kiyotaki and Moore [1997] model of credit cy- cles. Results are: patents as collateral leverages R&D finance and magnifies the e?ect of innovative rents on investment; the composition of current versus future financial constraints implies that firms savings decrease the steady state aggre- gate debt/patent ratio; the interaction between households and firms savings determine a leveraged growth of innovations which depends on the imperfection of collateral. Keywords: Collateral, Patents, Research and Development, Credit ra- tioning, Growth. ?University of Paris X and CEPREMAP, 48 Boulevard Jourdan 75014 Paris France. E-mail: †LEO, University of Orleans. E-mail: ‡American University of Paris, 147 rue de Grenelle, 75007 Paris, ESLSCA and CEPREMAP. E-mail: .

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”DeepPockets”,CollateralAssignmentsofPatents,andtheGrowthofInnovationsBrunoAmable∗Jean-BernardChatelain†KirstenRalf‡February14,2005AbstractThispaperstudieshowimperfectcollateralassignmentsofpatentscontributeto”deeppockets”savingsofinnovativeﬁrmsfacingrandominvestmentoppor-tunitiesinResearchandDevelopment(R&D)anddeterminethegrowthoftheirinnovations,usingaversionoftheKiyotakiandMoore[1997]modelofcreditcy-cles.Resultsare:patentsascollateralleveragesR&Dﬁnanceandmagniﬁestheeﬀectofinnovativerentsoninvestment;thecompositionofcurrentversusfutureﬁnancialconstraintsimpliesthatﬁrmssavingsdecreasethesteadystateaggre-gatedebt/patentratio;theinteractionbetweenhouseholdsandﬁrmssavingsdeterminealeveragedgrowthofinnovationswhichdependsontheimperfectionofcollateral.Keywords:Collateral,Patents,ResearchandDevelopment,Creditra-tioning,Growth.∗UniversityofParisXandCEPREMAP,48BoulevardJourdan75014ParisFrance.E-mail:bruno.amable@cepremap.cnrs.fr†LEO,UniversityofOrleans.E-mail:jean-bernard.chatelain@univ-orleans.fr‡AmericanUniversityofParis,147ruedeGrenelle,75007Paris,ESLSCAandCEPREMAP.E-mail:Ralfkirsten@aol.com.

“Itistheuncertaintycreatedbythislegalandregulatorystructure[intheUnitedStates]whichlendstotheverymarketimperfectionsandineﬃ-cienciescurrentlyminimizingtheabilitytoleveragethevalueofintellectualpropertyassetsandconsequentlystuntingtheeconomicgrowthofinventorsandentrepreneurs”Murphy[2002]reporttotheUnitedStatesPatentandTrademarkOﬃce.“Amoretraditionalinterpretationoftheinnovation-marketpowercor-relationisthatfailuresinﬁnancialmarketsforceﬁrmstorelyontheirownsupra-normalproﬁtstoﬁnancethesearchforinnovation.Theavailabilityofinternalsourcesoffunding(‘deeppockets’)areusefulforallformsofinvestment,butmaybeparticularlyimportantforR&D”,Blundell,GriﬃthandVanReenen[1999].1.IntroductionThepracticeoflendersreceivingacollateralassignmentofapatentconditionalupontheoccurrenceofcontinuingdefaultisslowlybecomingmoreandmoreprevalentandimportantintheUnitedStates.1Wealthcreationisincreasinglybasedoninnovationthat,inturn,cangiverisetoimportantintellectualpropertyrights.Formanycom-panies,theseintellectualpropertyrightsmayrepresenttheirmostvaluableassets.Unfortunately,manyinnovatorslackthecapitalnecessarytodevelopnewresearchandmustturntooutsidesourcesforfunding.Aspartofthefunding,theprovidersofcapitalgenerallyrequirecollateralassignmentsofpatentsorsecurityinterestsinpatents.Duetothelimitedavailibilityofcollateral,innovatorsmayfaceanexter-nalﬁnanceconstraintfosteredbytotheparticularimportanceofadverseselectionandmoralhazardproblemswhenﬁnancingR&D.Thatis,innovatorsdonotdiscloseprivateinformationonR&Dprojects.Whatismore,aspeciﬁcknowledgeoftheresearchareamayberequiredforeﬃcientexanteselectionofprojectsandexpostcontrol,whichinvolvesacostlyinvestmentforprovidersofexternalﬁnance,suchasventurecapitalists(Keuschnigg[2004]).Thereisnowconsiderableempiricalevidencethatvariablesrelatedtoﬁnancingconstraintssuchasleverageand/orcashﬂowavail-abilityarecorrelatedwithR&Dinvestmentinseveralcountries(seerecentsurveysbyBechettiandSierra[2001]andHall[2002]2).Blundell,GriﬃthandVanReenen1PatentRatingsisaUSservicewhichprovidesratingsforpatentsascollateralinformationfornowseveralyears.InthecontextofU.S.statelawandfederallaw,collateralassignmentofpatentsrequirestofollowanumberofpracticaltipstolimitpotentiallegalrisksandlegalcosts(SchaveyRuﬀ[2003]).2e.g.studiesbyHimmelbergandPetersen[1994],Blundell,GriﬃthandVanReenen[1999],Hall,Mairesse,BranstetterandCrepon[1999],Geroski,VanReenenandWalters[2001],Aghion,Bloom,Blundell,GriﬃthandHowitt[2002].2

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