On optimality of secrecy and scarcity of idea

Secrecy is considered inferior to patenting from the social welfare point of view due to limited dissemination of associated information. In a simple two-stage model where the success of the second innovation depends on information about the first innovation and complementary individual inspiration, this study shows that, if the number of firms pursuing the second innovation is exogenously given, shorter patent life with broad scope can encourage the first innovator to patent her innovation and achieve social optimum. If the number of firms is endogenously determined, secrecy can be socially superior to patenting for a large parameter space and the incentive alignment between the first innovator and social welfare is less a problem.