JOB-HOPPING IN THE SHADOW OF PATENT ENFORCEMENT

JOB-HOPPING IN THE SHADOW OF PATENT ENFORCEMENT Rajshr Agarwal* Robrt H. Smth School of Busnss Unvrsty of Maryland rajshr@umd.du Martn Ganco Carlson School of Managmnt Unvrsty of Mnnsota mganco@umn.du and Rosmar H. Zdons Lundqust Collg of Busnss Unvrsty of Orgon rmz@uorgon January 2011 * All authors contrbutd qually; nams appar n alphabtcal ordr. Ths rsarch has bnftd from grants from th Ewng Maron Kauffman Foundaton, th STEP Board of th Natonal Rsarch Councl, th GE Innovaton Fund of th Wharton School s Rgnald H. Jons Cntr, and th Unvrsty of Mchgan s Ross School of Busnss. W ar ndbtd to Atsush Ohyama for valuabl commnts on th analytcal modl and Myls Shavr for nsghtful suggstons on th mprcal mplmntaton. Shravan Gaonkar provdd xcllnt programmng support for th dvlopmnt of th matchng algorthm, whch also bnftd from advc from Juan Alcacr. W also thank rprsntatvs from Dow Jons Vntur On for data on vntur-backd start-ups and Kwanghu Lm for provdng accss to th Natonal Unvrsty of Sngapor patnt databas. Matt Danls, Fara Jabbar, Sa Lan, Natalya Shpakova, Own Smth, Lsl Schafr, and Ylna Slutskaya provdd xcptonal rsarch assstanc.

JOB-HOPPING IN THE SHADOW OF PATENT ENFORCEMENT ABSTRACT Job-hoppng by sklld ngnrs and scntsts provds a vbrant channl for knowldg dssmnaton wthn ndustrs. Whl pror studs suggst that strongr non-compt rgms rduc fludty n sklld labor markts, far lss s known about th addd shadows cast by patnt nforcmnt. Buldng on th ntry-dtrrnc ltratur, ths study dvlops and tsts a modl on how an mployr s rputaton for bng tough n th nforcmnt of patnts altrs th pcunary bnfts assocatd wth rtnton and, n turn, shaps mploy xt dcsons. Usng a datast on th US smconductor ndustry ovr a thr-dcad prod, w fnd that an ncras n mployr-lvl ltgousnss rducs th lklhood that mploy-nvntors wll lav to jon or form rval compans. Consstnt wth th modl, w also fnd that as mployrs grow mor ltgous, th avrag post-xt productvty of mploy-nvntors that choos to lav nonthlss ncrass. Paradoxcally, ths lattr fndng suggsts that tough rputatons mor powrfully dtr xts by lowr qualty workrs.

1 INTRODUCTION Job hoppng by sklld ngnrs and scntsts provds a vbrant channl for knowldg dssmnaton wthn ndustrs. For frms losng ky talnt, howvr, such dparturs can dlvr a doubl blow not only do thy los valuabl human captal but rvals stand to gan tchnologcal know-how at thr xpns. As a rsult, compttv advantag can b rodd. Ths study xamns, both formally and mprcally, th xtnt to whch ntrandustry mploy turnovr s shapd by th rputatons of mployrs for bng tough nforcrs of ntllctual proprty (IP). In contrast to th rlatv stablty of stat laws govrnng th nforcmnt of non-compt agrmnts, th fdral protcton affordd by patnts has changd dramatcally ovr th past thr dcads (Lands and Posnr, 2003). Most notably, nsttutonal rforms n th 1980s ncrasd th barganng powr of U.S. patnt ownrs and strngthnd th xclusonary protcton affordd by thos rghts (Galln, 2002). Followng ths landmark rforms, th numbr of IP-rlatd lawsuts n th Untd Stats xplodd, partcularly for dsputs ovr patnt-protctd nvntons (Bssn and Murr, 2006). Whl ths surg n patnt ltgaton has bn lnkd to compttv dynamcs n product markts (.g., Lanjouw and Schankrman, 2004; Somaya, 2003), far lss s known about th ffcts on labor markt actvty. Km and Marschk (2005) show, for xampl, that sctors xprncng hghr turnovr rats among sklld workrs accumulatd patnts mor aggrssvly n th wak of th 1980s rforms, thus hghlghtng a patnt s potntal rol n protctng nnovatng frms from nsdrs (.., potntally mobl workrs). Usng frm-lvl data n th U.S. smconductor ndustry and controllng for patnt portfolo szs, Agarwal, Ganco, and Zdons (2009) furthr documnt that as mployrs grow mor ltgous ovr patnts, th spllovrs prdctd for hrng organzatons ar rducd. 1

Although patnt nforcmnt appars to cast shadows ovr bhavor n markts for sklld labor, th mplcatons for mploy-lvl xt dcsons ar unxplord n pror work. To hlp fll ths gap, w draw on a longstandng body of work n stratgy and conomcs on th us of corporat rputatons as ntry-dtrrnc mchansms (Krps and Wlson, 1982; Mlgrom and Robrts, 1982; Wglt and Camrr, 1988). Vwng patnt nforcmnt as a gnral rputaton-buldng stratgy, w modl th ffcts of mployr ltgousnss on (unobsrvd) optmal compnsaton packags and, n turn, on (obsrvd) mploy-nvntor xt dcsons. In dong so, w rlax assumptons n pror modls of mployr-mploy xpropraton problms whr th safguards affordd by patnts ar thr absnt (Anton and Yao, 1995) or nffctual (.g., Franco and Flson, 2006). Emprcal mplcatons from th modl ar tstd usng a databas of patnt ltgaton hstors and mploy-nvntors 1 from th US smconductor ndustry ovr a thr-dcad prod. To forshadow our rsults, w prdct and fnd that ncrass n mployr-lvl ltgousnss (.., rputatons for IP toughnss 2 ) sgnfcantly rduc th lklhood that mploy-nvntors wll lav to jon or form rval compans. Put dffrntly, as mployrs assrt patnt rghts mor aggrssvly, thr rat of rtanng sklld workrs ncrass. In supplmntal analyss, w fnd lttl vdnc that ths mprcal pattrn s xpland by rvrs causalty (whr shfts n ltgousnss could altr hrng practcs rathr than mploy dparturs) or ndognty (whr mor valuabl patnts could yld a smultanous rs n a frm s propnsty to ltgat and hghr rtnton rats among mploy-nvntors). W thrfor ntrprt our vdnc as consstnt wth th vw that corporat rputatons for IP toughnss rduc th rlatv payoffs mploys antcpat from swtchng jobs wthn an ndustry, thus dtrrng voluntary dparturs. 1 Th trms mploys, sklld workrs, and mploy-nvntors ar usd synonymously n th papr. 2 Our convrsatons wth practtonrs suggst that a frm s ltgousnss ovr patnts corrlats wth ts stanc toward safguardng othr forms of IP, ncludng non-compts n mploymnt contracts and trad scrts. Unfortunatly, w lack rlabl data on ths frms hstors of nforcng non-patnt forms of IP. 2

Importantly, w also xamn th ffctvnss of ltgousnss as a rtnton mchansm across mploys wth dffrnt lvls of productvty. Consstnt wth th modl, w fnd that as mployrs grow mor ltgous ovr patnts, th avrag productvty of mploy-nvntors that choos to xt nonthlss ncrass. Paradoxcally, ths lattr fndng suggsts that tough rputatons may gnt an advrs sortng procss, mor powrfully dtrrng dparturs by lowr productvty workrs.. Blow, w brfly summarz pror rsarch that rlats most closly to ths study. Gvn thr salnc to argumnts w nvok n th formal modl, rcnt studs by Km and Marsch (2005) and Agarwal t al. (2009) ar dscussd n som dtal. In Scton 3, th ffcts of IP toughnss on mploy moblty dcsons ar nvstgatd n a formal modl. Sctons 4 and 5 tst svral mprcal mplcatons from th modl and rport our fndngs. Fnally, Scton 6 summarzs our rsults, acknowldgs lmtatons n th study, and dntfs opportunts for futur rsarch. 2 LITERATURE REVIEW 2.1 Larnng-by-hrng as an xpropraton problm In ponrng work, Arrow (1962) obsrvd that mploymnt turnovr among ngnrs and scntsts was a vhcl for transmttng tchnologcal know-how and nformaton across frm boundars. In th nsung dcads, scholars from across th flds of conomcs, socology, and managmnt hav producd vdnc that corroborats Arrow s famous conjctur. In a survy of R&D managrs, for xampl, Lvn t al. (1987) rport that hrng mploys from rvals ncrass th spd and ffcncy wth whch stablshd frms ncorporat nw tchnologs. Mor rcntly, numrous scholars hav usd patnt ctatons to trac th ffcts of moblty on knowldg dffuson (.g., Almda and Kogut, 1999; Rosnkopf and Almda, 2003; Ottl and Agrawal, 2008). Echong rsults from managral survys (Lvn t al., 1987; 3

Bhd, 1994), ths ctatons-basd studs furthr suggst that frms larn by hrng sklld ngnrs and scntsts from rvals. Whl th larnng-by-hrng ltratur nvstgats th ffcts of mploy turnovr on ntr-frm knowldg transfrs, a sparat strand of rsarch xplors th ntra-frm (mployr-mploy) dynamcs that gv rs to voluntary mploy dparturs (.g. Paks and Ntzan, 1983; Anton and Yao, 1995; Km and Marschk, 2005; Hllman, 2007; Cassman and Uda, 2006; Franco and Flson, 2006; Chattrj and Ross-Hansbrg, 2010). A common assumpton n ths lattr ltratur s that job hoppng poss an xpropraton problm to nnovatng frms: aftr hrng and tranng mploys and nvstng n costly R&D programs, ngnrs and scntsts may lav to xplot dscovrs on thr own. 3 Analytcal attnton thn shfts to th stratgc actons frms tak to rtan sklld workrs and/or dtr thm from msappropratng tchnologs condtonal upon xt. Most studs on ths mployr-mploy xpropraton problm valuat th trad-offs assocatd wth contractual solutons. Influntal work by Paks and Ntzan (1983), for xampl, modls th mplcatons of xpropraton hazards for th optmal dsgn of rwards systms. Smlarly, mor vdnc suggst that th barganng powr of nnovatng frms ovr knowldg workrs s gratr n stats whr th non-compt rstrctons n mploymnt contracts ar mor xpansvly nforcd (Stuart and Sornson, 2003; Fallck t al., 2006; Marx t al., 2009). As Anton and Yao (1995) dscuss, howvr, xpropraton problms n labor markts ar dffcult to solv through ncntvs and contracts alon. For mploys wth strong ntrprnural prfrncs, 3 For xpropraton to occur, of cours, mployrs must b unabl to fully captur th valu of tchnologcal nformaton lakd through labor markts. Instad, formr mploys and/or hrng organzatons must rap som dgr of prvat gans (whthr through gratr carr opportunts and hghr wags for formr mploys or rducd R&D costs for hrng mployrs). Not that ths assumpton dos not mply that all turnovr rsults n a ngatv xtrnalty to nnovatng frms. Rathr, t mor smply rqurs a postv probablty that whn mploys lav to jon rvals, mployrs ar not fully compnsatd for thr pror nvstmnts n human captal and R&D. S Acmoglu and Pschk (1998, 1999) for mor dtald dscusson. 4

for xampl, montary rwards may b an nsuffcnt mchansm for rtnton (Franco and Flson, 2006; Campbll t al., 2010). Contractual solutons ar furthr lmtd by th transacton costs assocatd wth ngotaton and nforcmnt (Acmoglu and Pschk, 1998; 1999). Fnally, and of partcular mportanc n th contxt of our study, many US tchnology compans ar basd n th stat of Calforna, whr carr rstrctons n nforcmnt contracts ar notorously dffcult to nforc (Glson, 1999). 2.2 Patnt acquston and nforcmnt as a non-contractual soluton In lght of ths contractual mprfctons, rcnt studs by Km and Marschk (2005) and Agarwal t al. (2009) nvstgat whthr th fdral protcton affordd by US patnts provds nnovatng frms an altrnatv mans for safguardng aganst tchnologcal xpropraton by nsdrs. As Mrgs (1997) xplans, lgal rghts to patnts basd on dscovrs by mploys durng work ar assgnd, wth rar xcpton, to mployrs (Mrgs, 1997). As a rsult, ncrasd patntng by th focal frm may rstrct th ablty of mploys xtng th frm (and thr nw mployrs) to mak, us, or buld upon th frm s patntd tchnologs unlss xplct prmsson to do so has bn grantd through a lcns agrmnt. Consstnt wth ths vw, Km and Marschk (2005) documnt that frms n sctors xprncng hghr turnovr rats among sklld workrs accumulatd patnts mor aggrssvly n th wak of th 1980s pro-patnt rforms. Mor rcntly, Agarwal t al. (2009) argu that th stratgc acton of nnovatng frms to nforc patnts not just th accumulaton of such rghts nfluncs labor markt actvty through a rputaton-buldng procss. As a rputaton-buldng mchansm, patnt nforcmnt offrs svral advantags ovr th smpl accumulaton of such rghts. Frst, a patnt confrs to ownrs th lgal rght but not th oblgaton to xclud othrs from makng, usng, or buldng on th clamd nvnton. Evn n tchnology-ntnsv sctors, frms may fl patnts aggrssvly wthout choosng to nforc thm (Zdons, 2003). Scond, th costs of patnt nforcmnt dwarf thos 5

assocatd wth patnt acquston, thus provdng a crdbl sortng mchansm for dstngushng btwn passv and tough mployrs (Spnc, 1974). Mor spcfcally, Lmly (2004) stmats that roughly $20,000 s rqurd to fl and obtan a US patnt of avrag complxty. In strkng contrast, from $3 to $5 mllon s typcally rqurd to ltgat a patnt nfrngmnt cas of avrag tchnologcal complxty (AIPLA, 2007). Bfor turnng to our modl, svral fndngs from th Agarwal t al. (2009) study warrant brf dscusson. As notd arlr, th authors fnd (basd on vdnc from U.S. smconductor frms and controllng for patnt portfolo szs) that as mployrs grow mor ltgous n nforcng patnts, th spllovrs to hrng organzatons ar rducd. Whl th authors nstrumnt moblty wth a gndr-basd varabl (that affcts moblty choc but not spllovr lvls drctly), thy do not nvstgat th broadr mplcatons of IP toughnss on mploy-lvl xt dcsons. Consstnt wth th stratgc dtrrnc ltratur (Schrr, 1980; Krps and Wlson, 1982; Mlgrom and Robrts, 1982), th authors furthr documnt that th rducd spllovr fndng holds rrspctv of whthr a frm actvly ltgats aganst all, or vn many, of ts xmploys. Ths fndngs suggst that pror ltgaton aganst drct product-markt rvals (.g., Intl s longstandng dsput aganst rval chpmakr, Advancd Mcro Dvcs) nfluncs th prcptons of mploy (and potntal hrrs) about thr mployrs lkly stanc aganst acts of xpropraton. If rputatons for IP toughnss altr knowldg flows n labor markts, th ffcts should rsd not only on hrng organzatons (as shown n pror work) but also on th xt dcsons of ndvdual mploys a mattr that w now turn to blow. 6

3 REPUTATIONS FOR IP TOUGHNESS AND EMPLOYEE EXIT DECISIONS: A FORMAL MODEL To analyz mor formally how ltgousnss affcts mploy xt dcsons, w dvlop a modl along th lns of Paks and Ntzan (1983) and Km and Marschk (2005). Instad of th patntng dcson n Km and Marschk (2005), w modl rputatonal stock (basd on th pror ntaton of patnt nfrngmnt lawsuts) condtonal on patntng.. Assumng that patnt ltgaton s costly, th rputaton for IP toughnss volvs slowly and s gvn at th tm of th mploy s xt dcson, mploys us pror ltgousnss to nfr whthr mployrs ar lkly to b tough or passv n th vnt that proprtary tchnologs ar msappropratd. Th st up of our formal modl s dntcal to th on by Km and Marschk (2005) who xtndd th modl by Paks and Ntzan (1983). Paks and Ntzan (1983) showd that whn th start-up ntry crats valu not only by xpropratng th ntllctual proprty hld by th ncumbnt frm t may b optmal to dsgn an mploymnt contract that dos not rtan th mploy n all stats of th world. Such stuaton s a startng pont of our and th Km and Marschk s (2005) modl. In contrast to modls that xplan th ndvdual xt dcson as affctd by prvat nformaton (Anton and Yao, 1995; Chattrj and Ross-Hansbrg, 2010; Klppr and Thompson, 2010), nablty to contract for prvat payoffs (Hllman, 2007), frctons n th projct mplmntaton (Cassman and Uda, 2006), or knowldg transfr (Franco and Flson, 2006), th payoffs n our modl ar contractbl, th probablts as wll as th payoffs ar known to both parts and w assum no frctons n th transfr of knowldg or projct mplmntaton. 3.1 Intuton In th modl that follows, ltgousnss s assumd to nflunc th focal scntst through th xpctaton that sh wll b sud for patnt nfrngmnt upon dpartur. W assum that pror aggrssv bhavor n nforcng patnts by th focal frm ncrass th 7

prcvd probablty that t wll ltgat aganst th focal scntst post-xt. Prdctons hng on two opposng ffcts. On on hand, as th prcvd lklhood of ltgaton ncrass, th xpctd valu of mplmntng th scntst s da outsd of th parnt frm dcrass. On th othr hand, th mployr s ablty to thratn th scntst wth lawsuts f sh xts lowrs th ncntvs of th parnt frm to offr hghr wags. Th nt ffct s non-obvous snc ltgaton s costly. As th xpctaton of ltgaton ncrass, th costs antcpatd from ltgous acton rs accordngly. To avod costly lawsuts post-xt, th mployr has an ncntv to offr hghr wags. Th ncras n ltgaton lklhood thus rsults n hghr rats of mploy rtnton. Importantly, th ncras n th lklhood of ltgaton (through hghr xpctd costs and consquntly a hghr wag offr) s suffcnt to nduc thos scntsts to stay who hav das wth outsd valu closst to a crtan thrshold. Whl th valu of ths thrshold ncrass wth ltgousnss, scntsts abov ths thrshold wll always mov. In othr words, th dtrrnt ffcts of ltgousnss ar prdctd to b strongr for mploys wth lowr (vrsus hghr) potntal outsd productvty. 3.2 Formal Modl Th basc stup s as follows: an mployr wants to dvlop and markt a product but to do so sh nds to hr a scntst. Aftr th scntst s hrd, dvlopmnt and producton taks two prods. In th frst prod, an da s dvlopd nto a product; n th scond, t s sold. Th mployr dos not nd th scntst n th scond prod to sll th product. At th bgnnng of th scond prod, vryon larns th valu of th dvlopd da for th frm, ρ (R + ), whch s a random varabl ralzd at th bgnnng of th scond prod. By th nd of th frst prod, th scntst has th knowldg to markt th da ndpndntly outsd of th frm, yldng a valu to th scntst from comptng wth hs formr mployr, ρ (R + ). ρ and ρ ar dstrbutd accordng to jont dnsty ƒ x-ant known to vryon. If th scntst dcds to xt and 8

markt th product ndpndntly, th comptton from th scntst lowrs th mployr s payoff by λρ wth λ[0,1]. Analogous to th patntng dcson modld n Km and Marschk (2005), w modl th ffct of patnt nforcmnt condtonal on patntng, thus mplctly nvokng th assumpton that rputaton stocks mov slowly. Wth som probablty γ th mployr s xpctd to ltgat aganst th scntst. Th lklhood γ s known to both parts xant and s a functon of th mployr s past ltgousnss (.., ts rputaton for IP toughnss ). 4 W assum that f th scntst xts, th mployr dos not know f th scntst wll nfrng th patnt. In cas of xt, howvr, th xpctd loss for th mployr wll b lowrd du to th possblty of ltgaton to (1-γ)λρ. If th mployr ltgats aganst th scntst, sh wll hav to pay attorny and court fs, L (R + ). W assum that n cas of ltgaton th scntst loss hs ntr proft ρ, thr du to fs or nfrngmnt sttlmnt. 5 Both parts ar assumd to maxmz xpctd ncom and b rsk nutral. At th bgnnng of prod on, th scntst dcds whthr to accpt hs mployr s wag offr, w 0, or work outsd th R&D sctor; th scntst s assumd to work for margnal product w n both prods f mployd n th outsd sctor. Th tmng of th modl s as follows: 1) Th mployr offrs w 0 ; th scntst accpts f w 0 > w (ths wll always hold) 2) Th scntst works for th mployr to dvlop th product 3) Th scntst and mployr larn ρ, ρ 4) Th mployr offrs w 1 5) If w 1 xcds th xpctd valu of xtng, th scntst stays; othrws, h lavs. 4 As notd arlr, rputatons for IP toughnss can b bult from pror patnt lawsuts ntatd aganst formr mploys as wll as product markt rvals or mtators. W do not modl th actual dcson to su a partcular scntst ovr a partcular nnovaton. Such dcson only mattrs n xpctaton at th tm of th xt dcson (for both th frm and th scntst). Th actual ltgaton dcson dpnds on whthr, n th futur, th scntst s gong to nfrng, and whthr, gvn nfrngmnt, th cost bnft rato of ltgaton justfs t for th partcular crcumstanc. Our assumpton mans that past rputaton of ltgousnss wll postvly mpact th prcpton that th mployr wll ltgat, all ls constant. 5 Ths assumpton s a smplfcaton and s not crtcal for our prdctons. 9

Th xpctd payoffs n th scond prod ar summarzd as follows: Scntst movs Scntst s payoffs Employr s payoffs No W 1 ρ w 1 + w Ys ρ γρ + w ρ - (1 - γ)λρ γl Mor formally, th mployr maxmzs th xpctd proft from hrng a scntst: π - w - w wf, d d - 1- Lf, d d 0 E 1 (1) S M whr M s a st of ρ, ρ such that scntst movs and S s a st whr sh stays. Th mployr hrs a scntst whn th xpctd proft s postv. Th scntst accpts th offr at th bgnnng of th frst prod f: S, d d - wf, d d w w0 w f (2) 2 1 M Th mployr s problm s to choos w 1, w 0 to maxmz (1) subjct to th partcpaton constrant of th scntst (2). A tm consstnt qulbrum s assumd such that both th mployr and th scntst tak th othr parts dcson n th scond prod as gvn. At th bgnnng of th scond prod, th mployr offrs a wag that maxmzs hr scond prod payoff and sts w 0 so that th partcpaton constrant holds wth qualty. Substtutng for w 0 n (1) and smplfyng w obtan: E - w f, d d - - 1- Lf, d d S M (3) Th trm ρ γρ n th scond ntgral rprsnts wag savngs du to th valu of th moblty opton for th scntst. To obtan w 1, w only nd to ralz that to nduc th scntst to stay, th mployr has to offr at last ρ γρ + w. w 1 = ρ γρ + w for ρ, ρ such that th scntst stays (4) 10

Not that th scond prod wag offr dcrass wth th antcpatd lklhood of ltgaton γ. Hghr γ dcrass th valu of moblty for th scntst; th wag offr rqurd to nduc th scntst to stay s thrfor rducd. Th partcpaton constrant can b usd to solv for w 0 : - wf, d d w 0 2w (5) Followng Km and Marschk (2005), w assum that =, whr dnsty q and,. R, ar constant mans of For w 0, w gt: and =, ar man zro random varabls wth jont and. w w (6) 0 w 0 w w w 1 f, 1 f 1 d d d Not that th w 0 s ncrasng wth th lklhood of ltgaton γ. Put dffrntly, an ncras n γ lowrs th valu of th moblty opton. Snc th valu of moblty s part of th wag offr, th mployr has to offr a hghr ntal wag to ntc th scntst to jon. 6 Fnally, to solv for th moblty condton, w nd to ralz that th mployr s wag offr w 1 (4) can b at most th costs assocatd wth moblty. Th scntst thrfor movs only f th valu of th moblty opton xcds hs ntrnal wag offr: f L, th scntst movs. (7) 6 Consstnt wth ths ntuton, Mon (2005) rports that ndvduals wth ntrprnural aspratons accpt pay cuts to apprntc wth frms that offr gratr post-xt opportunts for advancmnt. 11

Th lft sd rprsnts th nt gans from moblty to th scntst, on th rght sd s th ltgaton-adjustd loss du to comptton, and L ar ltgaton costs. Rarrangng trms, th moblty condton for th scntst s xprssd as follows: L (8) 1 Assumng that = and =, quaton (8) bcoms: L (9) 1 Equaton (9) mpls that th x-ant lklhood of moblty falls as th rght hand sd of ths nqualty grows largr. That s, th rang of valus that satsfy th L nqualty wll dcras wth ncrass of 1. To furthr drv th uncondtonal probablty of xt, w assum that and ar ndpndnt. 7 Snc th margnal dnsts of and ar also normal, and th two random varabls ar ndpndnt, w hav: 2 2 2 ~ N 0, (10) In th vnt that th nvntor movs (D=1), quaton (10) lads to th followng xprsson: 7 Ths assumpton s ncssary to drv nsghts about th ffcts of and. Also not that w stll rlat and usng and. Consquntly, th assumpton dos not rul out th possblty that th xtrnal valu, and th ntrnal valu, mov togthr. Th assumpton s also not ncssary for th mplcatons w tst mprcally. 12

Pr D 1 L Pr 1 Pr 1 2 2 2 1 2 2 2 1 2 2 2 L 1 L 1 (11) mplcatons 8 : In combnaton, xprssons (9) and (11) drctly yld th followng tstabl Implcaton 1: Th lklhood of moblty dcrass wth th antcpatd lklhood of ltgaton, γ. Th ncras n th lklhood of ltgaton dcrass th lklhood of moblty only bcaus futur ltgaton s costly. To avod ltgaton costs, th mployr s wllng to propos a hghr wag offr to nduc th scntst to stay. If th futur ltgaton costs ar zro, th lklhood of ltgaton has no ffct n cas of nfrngmnt, th mployr could rgan losss for fr. 9 Implcaton 2: Th avrag valu of das marktd by th scntst outsd of th parnt frm ncrass wth th antcpatd lklhood of ltgaton, γ. An ncras n th rght-hand sd of th nqualty (9) ncrass th thrshold of, abov whch th scntst movs. Incrass n wag offrs w 1 thus nduc scntsts to stay but only thos who hav das closst to th thrshold of. Th scntsts wth th bst outsd das (hghst ) wll always xt. Fnally, t s natural to quston how th lklhood of scntst s moblty dpnds on th valu of th projct. Examnng th ffcts of projct valus s also ntrstng n 8 W focus only on th mplcatons that w can tst mprcally. Th modl maks addtonal prdctons. For nstanc, th lklhood of moblty dcrass wth ltgaton costs, L, and th compttv mpact on th mployr, λ. 9 As notd n Scton 2, f ltgaton costs ar zro, mploys also would no longr b abl to dscrn tough mployrs from thr mor passv countrparts gvn th lack of a crdbl mchansm for sortng btwn typs. Also not that th avrag valu of das marktd by th scntst outsd of th parnt frm ncrass wth L and λ. 13

conjuncton wth Implcatons 1 and 2. For nstanc, th ltgousnss as a rtnton mchansm may b lss rlvant f th lklhood of moblty dcrass wth projct valus. Suppos that and ar rlatd by g. Thn, Pr D 1 1 g 2 2 2 1 2 2 2 L 1 (12) If th ntrnal and xtrnal valu of th projct, and ar ndpndnt or ngatvly rlatd, or.. f g 0, or g 0, thn th trm g s postv and th lklhood of moblty wll dcras wth and ncras wth Howvr, f and ar postvly rlatd,.. f moblty can ncras wth or dcras wth g. 0, thn th probablty of. In practc, th postv rlatonshp btwn and s vry lkly projcts that ar valuabl on th outsd markt wll b also valuabl for th parnt frm. Th modl dos not, howvr, mak unambguous prdctons about th ffcts of projct valus on th lklhood of moblty. For projcts that may lad to sgnfcant comptton f th scntsts xts (hgh λ), and th ons that hav a hghr rlatv valu ntrnally than on th outsd markt (postv but low g ) such that g s postv, thn moblty may dcras wth both and. Th modl thus dos not lnk projct valus wth nvntor xt dcson wthout takng nto account addtonal dynamcs gvn by λ and g(.). Du to data lmtatons, w do not xplctly tst th ffcts of th ntrnal and xtrnal projct valus on nvntor 14

xt. Howvr, w dscuss blow how our mprcal fndngs map onto a spcfc cas of λ and g(.). 4 EMPIRICAL ANALYSIS Th objctv of our analyss s to tst two man mprcal mplcatons of th modl. Frst, w nvstgat whthr rputatons for IP toughnss rduc th dparturs othrws xpctd for a frm s mploy-nvntors. Scond, w tst th xtnt to whch, f at all, th dtrrnt ffcts of IP toughnss ar mor pronouncd for mploys wth rlatvly low opportunts for outsd advancmnt. To tst th frst mplcaton of th modl, w mprcally nvstgat th rlatonshp btwn th pror ltgousnss of th mployr (proxd by th numbr of patnt nfrngmnt lawsuts ntatd by th frm) and mploy moblty dcsons. W us a laggd xplanatory varabl to rflct th assumpton of our modl that th rputatons ar fxd at th tm whn th scntst maks th moblty dcson. To tst th scond mplcaton, w xamn th rlatonshp btwn th ltgousnss and th post-xt nnovatv productvty of mobl nvntors. Th us of th post-xt nvntor productvty as a proxy for ρ s justfd f w assum that th projct valus wll postvly corrlat wth ndvdual nvntor productvty. Not that both of our mplcatons hold wthout makng an assumpton about th corrlaton btwn th ntrnal and xtrnal projct valus, ρ and ρ. As w mnton abov, t s vry lkly that, n ralty such corrlaton wll b postv, (.., g 0 ). If w assum that th postxt nvntor productvty s a proxy for ρ and th projct valus, ρ and ρ postvly corrlat thn th prdctons of our modl translat nto sortng by qualty ltgousnss as a rtnton mchansm wll b mor ffctv aganst lowr qualty mploys. Both 15

thortcally and mprcally, w thus do not nd to dsntangl th qualty of das from th ndvdual qualty. 4.1 Industry Contxt and Data Sourcs Th contxt of our study s th U.S. smconductor ndustry. Th ndustry xhbts a hgh dgr of mploy moblty that facltats ntr-frm transfrs of tchnologcal knowldg (Almda and Kogut, 1999; Rosnkopf and Almda, 2003). Frms n ths ndustry also hav hgh propnsts to fl patnts (Hall and Zdons, 2001) and appar to hav grown mor actv n nforcng thos xclusonary rghts of protcton (Zdons, 2003). Emprcally, w trac th nnovatv actvts of 447 U.S. smconductor frms ovr a thr-dcad prod. Whn w track moblty, w dstngush btwn frms that ar sourcs of nvntv talnt and othr frms n th ndustry that ar rcpnts. Th sampl prod starts n 1973 (th frst yar of avalabl ltgaton data) and 2003 (th last yar n whch w obsrv patnt actvty). Th sourc frm sampl s drawn from a comprhnsv lst of publcly-tradd U.S. frms that a) compt prmarly n smconductor product markts and b) ar foundd pror to 1995. 10 Rstrctng attnton to frms that ar publc by th md-1990s (n=136) allows a suffcntly long wndow through whch to vw possbl ltgousnss and moblty vnts. In 2000, ths frms collctvly gnratd ovr $88 bllon n annual rvnus and spnt $12 bllon n R&D. For ach sourc frm, w obsrv ntatons of patnt nfrngmnt lawsuts fld n U.S. courts btwn 1973 through 2001 basd on data compld n Zdons (2003) that mrg cas flngs rportd n lgal databass (Ltalrt by Drwnt) wth supplmntal nformaton rportd n archval 10-K flngs, nws artcls, and prss rlass. Importantly, ths data nabl us to dtrmn whn a frm fls a patnt nfrngmnt lawsut aganst a thrd party, not just whthr patnts awardd to that frm 10 Howvr, our sampl also ncluds th tm-prods whn ths frms wr prvat. W control for whthr th frm s publc or prvatly fundd wth a dummy. 16

ar nvolvd n ltgaton as s mor common n th ltratur (.g., Lanjouw and Schankrman, 2001; Somaya, 2003). W ar thrfor abl to construct a frm-spcfc ndcator of patnt toughnss that s allowd to vary ovr tm. W dntfy moblty vnts usng vdnc drawn from patnt data usng a mthodology consstnt wth othr ctatons-basd studs (.g. Almda and Kogut, 1999; Marx t al., 2009; Rosnkopf and Almda, 2003). Th approach rqurs both sourc and rcpnt frms to rcv at last on U.S. patnt. For th combnd st of 447 frms, w ntgrat fnancal data from Compustat and VnturOn, patnt data from Dlphon and th Natonal Unvrsty of Sngapor, and patnt ltgaton hstors (for sourc frms) from Zdons (2003). 4.2 Estmaton Mthodology W stmat th rgrssons usng Logt and OLS wth th moblty vnt or th post-moblty patntng productvty as th rspctv dpndnt varabls. To allow tm-nvarant sourcs of htrognty among frms (.g., organzatonal cultur or HR practcs) to affct moblty dcsons, w us a sourc frm fxd-ffcts spcfcaton. Th stmats thrfor tst for wthn-frm changs ovr tm. To control for th fact that nvntor xt and ltgaton pattrns of falng frms may systmatcally dffr, w xcludd obsrvatons n th yar and th pror yar of th focal frm xt. W control for both nvntor- and frm-lvl varabls rlatd to th ntnsty and natur of nvntv actvty as wll as for tm trnds. To furthr rul out ndognty and slcton, w mploy a subsampl analyss and an nstrumntal varabl approach dscussd mor fully blow. Our sampl s an unbalancd panl wth th unt of analyss of an ndvdual nvntor. 17

4.2.1 Dpndnt varabls Moblty: Th dpndnt varabl s a bnary ndcator st to 1 f our moblty matchng algorthm dntfs th focal nvntor as apparng on a subsqunt patnt assgnd to a rcpnt frm othr than th focal mployr. Th varabl and our mthod s thus analogous to that ons usd by Marx t al. (2009) and capturs th ntra-ndustry movmnt of nvntvly productv mploys. To dtrmn nstancs n whch nvntors chang frms, w mplmnt th matchng algorthm dscrbd n Agarwal t al. (2009) that allows us to rcrat unqu nvntor patntng hstors, as wll as nvntor movs wthn our sampl. W xcludd th moblty vnts that concdd wth acqustons btwn th sourc and th rcpnt frm and xcludd moblty vnts whn th rcpnt frm was a spnoff or rcvd captal nvstmnts from th sourc frm. For 28,123 unqu nvntor nams lstd n patnts awardd to frms n th sampl, th algorthm ylds 1,166 moblty vnts. An nvntor s prsnt n th data for 2.2 yars on avrag, masurd as th man dffrnc btwn th frst and last patnt applcaton dat. Post-moblty patntng productvty: To proxy th qualty of das mplmntd by th focal nvntor outsd of th parnt frm contxt, w masur th patntng productvty of nvntors post-moblty. Ths productvty s smply calculatd as th avrag numbr of patnts th nvntor gnrats at th rcpnt frm (total numbr of patnts th nvntor gnrats at th rcpnt frm dvdd by th dffrnc btwn th applcaton yar of th last patnt at th rcpnt and th applcaton yar of th frst patnt at th rcpnt plus on). 11 11 W obtand smlar rsults usng an altrnatv, ctaton-basd, avrag nvntor productvty masur. 18

4.2.2 Man xplanatory varabl Ltgousnss, our masur for IP toughnss, s a tm-varyng masur basd on th obsrvd bhavor of a focal sourc frm n nforcng ts xclusonary rghts to patntprotctd tchnologs. W masur ltgousnss usng a thr-yar movng sum, laggd on yar (sum ovr t-1 to t-3), of th numbr of unqu patnt nfrngmnt lawsuts launchd by a focal sourc frm btwn 1973 and th focal yar of obsrvaton. 12 W xprmntd wth altrnatv masurs such as laggd cumulatv counts or movng sums usng dffrnt tm wndows rangng from on yar to all avalabl yars. Th ltgaton counts ar corrlatd ovr tm and usng th altrnatv masurs has lttl qualtatv ffct on our rsults. W also xamnd th us of sparat lags wth dntcal fndngs and consstnt sgns across lags. 4.2.3 Instrumnts To addrss possbl ndognty of th ltgousnss varabl, w also mplmnt an nstrumntal varabl stmaton. Our man ndognty concrn s that th ltgousnss may proxy for unobsrvd qualty of th undrlyng tchnology: as frm s tchnology bcoms mor valuabl ovr tm th frm may dcd to b mor ltgous and smultanously b mor succssful n rtanng sklld workrs. If tru, ltgousnss and mploy rtnton may b corrlatd but not causally rlatd. It s possbl, that th tm-nvarant frm fxd ffcts and th ndvdual and frm-lvl controls w mploy ar nsuffcnt to fully captur ths unobsrvd hgh qualty tchnology ffct. To addrss ths ssu, w draw nsghts from th lgal ltratur (Moor, 2001; Ksan and Ball 2006, 2010), whr court-lvl charactrstcs (of ffctvnss and xprnc ) ar shown to dramatcally affct ltgaton outcoms and thrby affct th dcsons of frms to fl lawsuts. Usng annual statstcs rportd n Ksan and Ball (2006, 2010), w masur th charactrstcs of th dstrct courts n whch th focal frms ltgat thr patnts along svral dmnsons ncludng th numbr of cvl and patnt 12 In ln wth arlr dscusson n th papr, to captur rputatonal ffcts, w masur th ltgous actvty of th sourc frm aganst all dfndants rathr than aganst a partcular mploy or rcpnt frm. 19

lawsuts and th numbr of judgs n ths courts. As summarzd n Tabl 1, w thn construct svral varabls to captur court ffctvnss and xprnc - usng not only th numbr of cvl and patnt lawsuts n total but also cass hard on a pr-judg bass (Tabl 1). Th ky assumpton bhnd ths nstrumnts s that th court-lvl charactrstcs mpos an xognous sourc of varaton n th frm s dcson to ltgat. Importantly, ths court charactrstcs should not affct moblty drctly. In othr words, w assum that th nstrumnts ar xcludabl from th scond stag rgrsson - uncorrlatd wth th potntally unobsrvd changs n th frm s tchnologcal qualty. 13 4.2.4 Control Varabls In addton to sourc frm fxd ffcts and yar dumms w ncludd svral nvntor- and frm-lvl controls to captur ndvdual htrognty and tm-varyng frm ffcts whch could potntally affct xt chocs wthn our contxt. W nclud Invntor s Numbr of Patnts at th sourc frm to captur nvntor s pr-xt productvty. 14 W control for Invntor s Numbr of Co-nvntors to captur th xtnt of knowldg spcalzaton; Gndr and Ethncty to captur dffrnt propnsts for moblty du to dmographcs; and th Numbr of Yars Patntng wthn Parnt to captur tnur and snorty ffcts. At th frm lvl, w nclud Frm Ag and Log Numbr of Employs to captur changs n th ag and sz ffcts ovr tm. W account for R&D Intnsty to captur how frm s rsarch nvstmnts chang ovr tm - potntally affctng rtnton of rsarch workrs. W also control for th IPO vnt, 13 Th choc of th lgal vnu n patnt cass s typcally gvn by th locaton of th dfndant s actvts (Moor, 2001). Howvr, th lgal ltratur (Moor, 2001) suggsts that th plantffs hav som lattud for slcton of lgal vnus spcally whn th dfndant s a larg company (.., forum shoppng ). Howvr, t appars that th constrand choc of th lgal vnu s manly drvn by how sympathtc courts ar toward patnt ownrs n gnral and s lkly not corrlatd wth frm-lvl changs n th tchnologcal qualty ovr tm. If that s th cas, thn our nstrumnt xognty assumpton s stll vald. W tst th valdty of our nstrumnts blow. 14 Ths s potntally a proxy for ρ. As w mnton abov, w cannot consdr th coffcnt on ths varabl as a tst of th modl du to th ambguous modl prdcton wth rspct to ρ. Howvr, w dscuss how th rsult wthn our contxt maps onto th modl paramtrs. 20

usng th Publc Frm dummy, to captur gratr avalablty of cash wth mplcatons for nvntor rtnton. Tabl 1 summarzs and dscrbs th constructon of th varabls n mor dtal. 5 RESULTS Th rsults of our stmatons ar rportd n Tabls 4 and 5. To tst th man prdcton of our modl that pror ltgousnss wll rduc mploy moblty rats, w us both Lnar Probablty and Logt modls wth nvntor moblty as th dpndnt varabl. Th stmats of th control varabls (Tabl 1, Modl 1) ndcat that nvntors wth mor co-nvntors, mal, non-wht, and wth lowr tnur ar mor lkly to mov. Intrstngly, w fnd that th coffcnt on th pr-xt nvntor productvty (Invntor s Numbr of Patnts n a Focal Yar) s postv. If w assum that ths s a proxy for ρ, t s consstnt wth th trm g n (12) bng ngatv. Ths could occur f λ s small and/or g s postv and larg. In othr words, t occurs whn th compttv mpact of th potntal ntry s rlatvly small (.g. thr s a strong potntal for dffrntaton) and th das dvlopd ntrnally hav substantal valu outsd of th ncumbnt frm contxt. Such mplcatons appar to b consstnt wth th natur of th smconductor ndustry wth ampl opportunts for dffrntaton, modularzaton and low ntry barrrs (Machr, Mowry & Hodgs, 1998; Lndn & Somaya, 2002). Th rsult thus appars to corroborat th prdctons of our modl. Importantly, th postv ffct of th pr-xt nvntor productvty suggsts that hghr qualty mploys ar mor mobl potntally ncrasng rlvanc of ltgousnss as a rtnton mchansm. 21

As prdctd, w fnd rsults strongly consstnt wth ltgousnss nhbtng ntra-ndustry moblty. Tabl 4, Modl 1 shows th man modl. Th addtonal flng of a patnt lawsut by an mployr dcrass th lklhood of mploy-nvntor xts by approxmatly 3 prcnt. At an avrag of fv lawsuts n th last thr yars for th ltgatng frms, ths translats nto a 15% rducton n th lklhood of th mploynvntor xt. Tabl 4, Modl 2 shows th sam modl usng a subsampl of nvntors who jond th frms that dd not ltgat n th past (btwn t to t-3). On could argu that slcton mght b drvng th rsults as frm bcoms mor ltgous t s mor lkly to attract lss mobl nvntors. W addrss ths ssu by focusng only on nvntors whos frms startd ltgatng only onc thy wr alrady thr. In support of our argumnt, Tabl 4, Modl 2 shows consstnt rsults. To addrss possbl ndognty, w mploy an nstrumntal varabl approach. As dscrbd abov, w nstrumnt ltgousnss wth court charactrstcs (numbr of patnt and cvl lawsuts n total and on a pr-judg bass). Tabl 4, Modl 3 and 4 rport rsults for th full sampl and for th subsampl of mploys who jond nonltgatng frms, rspctvly. Th modls show consstnt and robust fndngs. In th frst stag of th nstrumntal varabl stmaton, th nstrumnts ar sgnfcant at a 1% lvl. In th scond stag (Modls 3 and 4), th nstrumnts pass th Sargan ovrdntfcaton tst wth p-valus of 0.13 and 0.23 (Modl 3 and 4 rspctvly). Intrstngly, th p-valu for th Durbn-Wu-Hausman tst s 0.12 suggstng that ltgousnss s not ncssarly ndognous n our stmaton and vn th us of th nonnstrumntd varabl s justfd. Tabl 5 provds th tst of th scond man prdcton of th modl about th rlatonshp btwn ltgousnss and th post-moblty patnt productvty of xmploys. 22

Frst, as w xpctd, th stmat of th coffcnt on th pr-xt nvntor productvty (Invntor s Numbr of Patnts n a Focal Yar) s postv and sgnfcant ndcatng that pr-xt and post-xt nvntor productvty ar postvly rlatd. To tst th prdctons of our modl, w rplcat th analyss usng th full sampl and subsampl and wth nstrumnts. Th rsults n Modls 1-3 of Tabl 5 ar qut consstnt. Each addtonal lawsut ntatd by th mployr translats nto about 2% ncras n post-moblty avrag patntng productvty. Th nstrumntal varabl stmaton passs th Sargan tst wth a p-valu of 0.31. Fnally, Modls 4 and 5 n Tabl 5 splt th sampl nto two sub-sampls: nvntors wth abov avrag and blow avrag post-xt productvty. Basd on our modl s prdctons, w should antcpat a strongr ffct on th lowr half of th dstrbuton. That s, IP toughnss should hav a mor pronouncd ffct n th rtnton of lss productv nvntors. Th rsults n Modls 4 and 5 ar n ln wth ths prdcton. IP toughnss has a sgnfcant ffct on th rtnton of nvntors at th lowr half of th productvty dstrbuton but s nsgnfcant n th uppr half of th dstrbuton. Ths supplmntal analyss may also hlp to allvat concrns that ltgousnss smply proxs for th tchnologcal qualty of an mployr s das on th outsd markt. If tru, th rlatonshp btwn ltgousnss and post-moblty prformanc should b postv and sgnfcant across th productvty dstrbuton, whch s not th cas. 6 DISCUSSION AND CONCLUSION Whl pror studs suggst that strongr non-compt agrmnts rduc fludty n markts for sklld labor (.g., Glson, 1999; Marx t al., 2009), far lss s known about th addd shadows cast by patnt nforcmnt. Ths study dvlops and tsts a modl on how an mployr s rputaton for IP toughnss altrs mploy-nvntor moblty dcsons. Usng wthn-frm stmats from th US smconductor ndustry ovr a thrdcad prod, w fnd that as mployrs grow mor ltgousnss ovr patnt-protctd 23

tchnologs, th lklhood that mploy-nvntors lav to jon or form rval frms s rducd. Consstnt wth th modl, w also fnd that as mployrs grow mor ltgous, th avrag productvty of mploy-nvntors that choos to lav nonthlss ncrass. Paradoxcally, ths lattr fndng suggsts that tough rputatons may gnt an advrs sortng procss, mor powrfully dtrrng dparturs by lowr qualty mploy-nvntors. Such rsult s vn mor salnt wthn th contxt of th rlatonshp btwn pr-xt nvntor productvty and nvntor moblty. In our focal ndustry, w fnd that hghly productv nvntors ar mor mobl. Ths prhaps justfs th us of stratgc lvrs - ncludng ltgousnss as an mploy rtnton mchansm. Th fndng has thus a drct managral mplcaton. Th stcks, lk th aggrssv patnt nforcmnt stratgs, ar not ncssarly ffctv as a rtnton mchansm aganst th mploys who th frms would prfr to rtan th most and, at th sam tm, fac th hghst lklhood of moblty ts bst popl. Furthr, t s lkly that frms nvst havly n thr most productv mploys. From th polcy prspctv, our fndngs mply that any strong patnt nforcmnt rgulatons aganst formr mploys ar not ncssarly ffctv n protctng such nvstmnts n human captal. Our study has multpl lmtatons. Our analytcal modl s vry smpl. Our focus on th ffcts of ltgousnss on moblty allows us to abstract away from th actual dcson to ltgat as bng part of th optmzaton problm. W do not nd to drv th optmal ltgaton polcy to b abl to gnrat our nsghts. Th drawback s that w cannot mak polcy or managral rcommndatons wth rspct to th ltgaton dcsons. Modlng ltgousnss would rqur spcfyng ts drvrs whch ar complx and go byond th rlatonshp btwn ltgousnss and mploy xt dcsons. Includng addtonal frctons to th modl, lk prvat nformaton, may also gnrat nw nsghts. For nstanc, mploys wth th most promsng das may dsproportonatly fal to dsclos thr dscovrs to ltgous mployrs, as Anton and 24

Yao (1995) suggst. Also mprcally, n ths vnt, th dffrntal ffcts of ltgousnss on dparturs by low vrsus hgh-qualty mploys may b undrstatd basd on data compld from mploy-nvntors. Du prmarly to data lmtatons, our analyss s rstrctd n othr ways that could b mprovd upon n futur work. W do not obsrv actual wags. W hav to mak ndrct nfrncs about how th frms n our sampl chang thr compnsaton packags n rspons to potntal xt dcsons and thr pror nvstmnts n patnt nforcmnt. Evn though such approach s consstnt wth pror work (Km and Marschk, 2005), xamnng th qustons wth datast that would nclud nformaton on wags (.g. basd on th U.S. Cnsus; Campbll t al., 2009; Mon, 2005) would allow not only for a strongr tst but also provd opportunts for askng mor fn-grand qustons. W only xamn ntra-ndustry moblty vnts. It s possbl that IP toughnss affcts nvntor chocs of stayng n th focal ndustry. In rcnt work on mploy rsponss to non-compt rstrctons n mploymnt contracts, Marx (2010) documnts that many sklld workrs tak carr dtours, ffctvly wthdrawng from actvts n thr man profsson, untl rstrctons n th contract ar lftd. In ths study, w ntntonally rstrctd attnton to movmnt by mploy-nvntors to othr frms wthn th ndustry to captur mploymnt changs n whch xpropraton hazards ar mor salnt. In th sprt of Marx (2010), t would b ntrstng to nvstgat whthr ltgousnss affcts th dstanc mobl workrs kp from formr mployrs n th vnt of dpartur. Th structur of our data wth focus on th ltgatng sourc frms and subsqunt moblty vnts translats nto our nablty to xamn hrng dcsons by ncumbnt frms. An mportant quston for furthr rsarch s thus whthr aggrssvnss n nforcng ntllctual proprty dtrs hgh qualty mploys from takng a job at th focal mployr. 25

Ths study contrbuts to svral strands of ltratur. A growng ltratur on larnng-by-hrng (.g., Almda and Kogut, 1999; Rosnkopf and Almda, 2003) mplctly assums that mployrs of mobl talnt play a passv rol n shapng turnovr among knowldg workrs. W provd nw vdnc that corporat rputatons for IP toughnss not only rduc th ntr-frm knowldg transfr antcpatd from moblty vnts (Agarwal t al., 2009), but also may dtr mploys from lavng. For th ltratur on patnt ltgaton (Somaya, 2003; Lanjouw and Schankrman, 2001), our study rass th possblty that ltgous acton confrs rputaton ffcts n labor markts, thus rvalng a sourc of asymmtry btwn ltgatng parts that has rcvd lttl pror attnton. Fnally, our mprcs rsonat wth rcnt vdnc by Marx t al. (2009) that documnts hghr rtnton rats of mploy-nvntors followng a stat-lvl shft toward strongr non-compt nforcmnt. Importantly, our rsults suggst that th fdral protcton affordd by patnts and th stratgc actons mployrs tak to nforc thm also nflunc job hoppng among sklld workrs, a fndng of practcal salnc snc many US tchnology compans rsd n Calforna, whr non-compts ar unnforcabl (Glson, 1999). 26

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Tabl 1: Varabl Dfntons Dpndnt Varabls Intra-ndustry Moblty Evnt Post-moblty Patntng Productvty Explanatory Varabls Numbr of Lawsuts Intatd (3-yar movng sum) Controls Invntor's Numbr of Patnts Invntor's Numbr of Convntors Gndr (1=fmal) Ethncty (1=Non-wht) Numbr of Yars Patntng Wthn Parnt Frm Ag Log Numbr of Employs R&D Intnsty Publc Frm Instrumnts Numbr of cvl lawsuts Numbr of patnt lawsuts Numbr of patnt lawsuts pr judg Numbr of cvl lawsuts pr judg A bnary ndcator st to 1 f th focal nvntor appars on a subsqunt patnt assgnd to a frm from th rcpnt sampl Numbr of patnts appld for by th mobl nvntor at th rcpnt frm dvdd by th numbr of yars at th rcpnt frm. Movng sum of th patnt ltgaton lawsuts ntatd by th sourc frm ovr th yars t-1 to t-3. Numbr of patnts th nvntor rcvd n a focal yar at th sourc frm. Avrag numbr of patnt co-nvntors n a gvn yar at th sourc-frm. 1 f fmal, 0 othrws - dtrmnd by th frst nam on th patnt documnt. 1 f Asan, Mddl-Eastrn or Indan soundng nam lstd on th patnt documnt, 0 othrws. Calculatd as th dffrnc btwn th focal yar mnus th applcaton yar of th frst patnt at th parnt plus on. Calculatd as th currnt yar mnus th foundng yar Log Numbr of mploys. R&D xpndturs dvdd by sals n a focal yar. 1 f th frm s publc, 0 f prvat. Avrag numbr of cvl lawsuts ltgatd n courts usd by th focal frm btwn th yars t-1 to t-3. Th nstrumnt s mputd wth 0 f th focal frm dos not ltgat n a gvn yar. Avrag numbr of patnt lawsuts ltgatd n courts usd by th focal frm btwn th yars t-1 to t-3. Th nstrumnt s mputd wth 0 f th focal frm dos not ltgat n a gvn yar. Avrag numbr of cvl lawsuts pr judg ltgatd n courts usd by th focal frm btwn th yars t-1 to t-3. Th nstrumnt s mputd wth 0 f th focal frm dos not ltgat n a gvn yar. Avrag numbr of patnt lawsuts pr judg ltgatd n courts usd by th focal frm btwn th yars t-1 to t-3. Th nstrumnt s mputd wth 0 f th focal frm dos not ltgat n a gvn yar. 31

Tabl 2 Summary statstcs Varabl Obs. Man Std. Dv. Mn. Max. Intra-ndustry Moblty 54804 0.016 0.127 0 1 Post-moblty Patntng Productvty 902 1.402 1.044 0 14 Numbr of Lawsuts Intatd (3-yar movng sum) 54804 2.888 4.286 0 17 Invntor's Numbr of Patnts n a Focal Yar 54804 1.173 2.078 0 163 Invntor's Avrag Numbr of Co-nvntors 54804 1.422 1.779 0 20 Gndr (1=fmal) 54804 0.023 0.150 0 1 Ethncty (1=Non-wht) 54804 0.234 0.423 0 1 Numbr of Yars Patntng Wthn Parnt 54804 3.680 3.635 1 27 Frm Ag 54804 26.03 12.007 0 52 Log Numbr of Employs 54804 9.572 1.608 2.833 11.406 R&D Intnsty 54804 0.028 0.025 0 0.298 Publc Frm 54804 0.992 0.086 0 1 32

Tabl 3 Corrlatons 1. Intra-ndustry Moblty 1 2. Post-moblty Patntng Productvty (Cond. on moblty). 1 3. Numbr of Lawsuts Intatd (3-yar movng sum) -0.0479 0.0793 1 4. Invntor's Numbr of Patnts n a Focal Yar 0.0068 0.1173-0.0531 1 5. Invntor's Avrag Numbr of Co-nvntors 0.0076-0.0211-0.0199 0.2236 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 6. Gndr (1=fmal) -0.0103-0.0057 0.0073-0.0108 0.0419 1 7. Ethncty (1=Non-wht) 0.0288 0.0406-0.025 0.0234 0.0585-0.0499 1 8. Numbr of Yars Patntng Wthn Parnt -0.0268-0.0004 0.1799-0.0078-0.1316-0.0534-0.0824 1 9. Frm Ag -0.0526 0.0504 0.4753-0.042-0.007 0.0129-0.0091 0.2588 1 10. Log Numbr of Employs -0.0686 0.0129 0.4559-0.051-0.0354 0.0017-0.044 0.1624 0.7376 1 11. R&D Intnsty 0.0234 0.0112-0.2672 0.0727 0.1405 0.0152 0.1124-0.1236-0.3746-0.5314 1 12. Publc Frm -0.0236 0.0498 0.0572 0.011 0.0003-0.0006 0.0128 0.0231 0.1157 0.0309 0.0472 33

Tabl 4 Ltgousnss and nvntor moblty Modl Modl 1 Modl 2 Modl 3 Modl 4 Logt Logt OLS OLS Man Modl Employs jonng nonltgous frms only Instrumntal varabl stmaton Instrumntal varabl stmaton wth sampl as n Modl 2 Dpndnt Varabl Moblty Numbr of Lawsuts Intatd (3-yar movng sum) -0.050*** -0.085** -0.002** -0.001* Control Varabls Invntor's Numbr of Patnts n a Focal Yar 0.020* 0.058** 0.001** 0.001** Invntor's Avrag Numbr of Co-nvntors 0.043* 0.063** 0.001** 0.001*** Gndr (1=fmal) -0.643** -1.212** -0.007** -0.016*** Ethncty (1=Non-wht) 0.351*** 0.243 0.006*** 0.006* Numbr of Yars Patntng Wthn Parnt -0.028* -0.038* -0.0002* -0.0006** Frm Ag -0.049-0.05-0.0007* -0.0006 Log Numbr of Employs -0.313-0.117-0.005** -0.003 R&D Intnsty -8.482-7.361* -0.21*** -0.178* Publc Frm -0.82-0.208-0.018* -0.01 Frm Effcts Ys Ys Ys Ys Yar Effcts Ys Ys Ys Ys Constant -15.622-16.576 0.049* 0.034 Psudo R2/R2 0.104 0.113 0.05 0.06 Log Lklhood -4113-2514 Sargan ovrdntfcaton tst (p-valu) 0.14 0.23 N 54,804 25,942 54,804 25,942 * p<.1, ** p<.05, *** p<.01, sngl-sdd tsts. Errors wr clustrd by frms. Instrumnts usd: Numbr of cvl lawsuts pr judg, Numbr of patnt lawsuts pr judg, Total cvl lawsuts, Total patnt lawsuts (all avrags n courts usd by th focal frm). 34

Tabl 5: Ltgousnss and th patnt productvty of dpartng mploy-nvntors (OLS) Modl Modl 1 Modl 2 Modl 3 Modl 4 Modl 5 Man modl Employs jonng non-ltgous frms only Instrumntal varabl stmaton Splt sampl (lowr 50% of DV) Splt sampl (uppr 50% of DV) Dpndnt Varabl Post-moblty Patntng Productvty Numbr of Lawsuts Intatd (3-yar movng sum) 0.025* 0.038* 0.147** 0.008** 0.016 Control Varabls Invntor's Numbr of Patnts n a Focal Yar 0.127** 0.157* 0.131*** 0.012 0.17* Invntor's Avrag Numbr of Co-nvntors -0.022-0.005-0.024-0.0001-0.059* Gndr (1=fmal) 0.021-0.17-0.077-0.018 0.128 Ethncty (1=Non-wht) 0.022-0.013-0.003 0.028 0.054 Numbr of Yars Patntng Wthn Parnt -0.005-0.007 0.035 0.003* 0.011 Frm Ag 0.042** 0.008 0.004* -0.012 0.009 Log Numbr of Employs 0.142** 0.009 0.066-0.036 0.26 R&D Intnsty -5.605-8.826** -4.79 0.747-9.19 Publc Frm 0.706** 0.389 0.455 0.12 0.537 Frm Effcts Ys Ys Ys Ys Ys Yar Effcts Ys Ys Ys Ys Ys Constant -0.132 1.059 0.747 1.042*** -0.574 R2 0.07 0.08 0.09 0.29 0.18 Sargan ovrdntfcaton tst (p-valu) 0.31 N 902 597 902 454 454 * p<.1, ** p<.05, *** p<.01, sngl-sdd tst. Errors wr clustrd by frms. Instrumnts usd: Numbr of cvl lawsuts pr judg, Numbr of patnt lawsuts pr judg, Total cvl lawsuts, Total patnt lawsuts (all avrags n courts usd by th focal frm). 35