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Journal of Law, Economics, and Organization Advance Access published online on August 21, 2009
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewp020
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© The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

An Economic Analysis of Trade-Secret Protection in Buyer-Seller Relationships

Stefan Bechtold

ETH Zurich

Felix Höffler*

WHU Vallendar

* Economics Group, WHU-Otto Beisheim School of Management, Vallendar/Koblenz, Germany. Email: felix.hoeffler{at}whu.edu.

The economic analysis of trade-secret protection has traditionally focused on the interests of companies to conceal information from competitors in order to gain a competitive advantage through trade-secret law. This has neglected cases in which the interest is not in concealing information from competitors but from trading partners. We investigate trade-secret protection in such cases. Frequently, asymmetric information will lead to inefficient trade; at the same time, protecting private information might create incentives for socially desirable investments. We model this trade-off in a simple buyer-seller model and find that the optimal fine for violations of trade secrets is positive. In general, however, the welfare effects of increasing a fine are ambiguous. We discuss conditioning the legal protection on a minimum investment by the informed party to conceal the information and argue that this helps to apply trade-secret protection only when it increases welfare. This rationalizes important features of current legal practice. (JEL K2, D82)


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