Patents as Information Transfer Mechanisms: To Patent or (Maybe) Not to Patent

A model of patenting behavior is presented in which an innovating firm has private information about profits available to competitors and patent coverage may not exclude profitable imitation. The model is a 3-stage game that involves: 1. an innovation race, 2. a patent game, and 3. a distribution of products. A broad range of predictions are obtained, including that a firm will patent only some portion of its produced innovations, and this portion is positively correlated with endogenous research and development outlays. Numerous extensions of the model are developed, for example, the inclusion of an explicit patent race and the emergence of trade secrecy. Finally, the impact of the relaxation of several of the model's assumptions is considered, and it is argued that the model could be given a Nash interpretation that agrees with the results obtained.