Arrow information paradox

The Arrow information paradox (information paradox for short), and occasionally referred to as Arrow's disclosure paradox. named after Kenneth Arrow, American economist and joint winner of the Nobel Memorial Prize in Economics with John Hicks,[1] is a problem that companies face when managing intellectual property across their boundaries. This happens when they seek external technologies for their business or external markets for their own technologies. It has implications for the value of technology and innovations as well as their development by more than one firm and for the need for and limitations of patent protection.

Arrow's information paradox theory was set out in a 1962 paper.[2] Cornell Law School professor Oskar Liivak has written in a paper for a conference at Stanford University that Arrow's "paper has been one of the foundational theoretical pillars of the incentive based theory of patents as Arrow’s work is thought to rule out a strictly market-based solution."[3]

A fundamental tenet of the paradox is that the customer, i.e. the potential purchaser of the information describing a technology (or other information having some value, such as facts), wants to know the technology and what it does in sufficient detail as to understand its capabilities or have information about the facts or products to decide whether or not to buy it.[4][5]

Once the customer has this detailed knowledge, however, the seller has in effect transferred the technology to the customer without any compensation.[1] This has been argued to show the need for patent protection.[3]

If the buyer trusts the seller, or is protected via contract, then they only need to know the results that the technology will provide, along with any caveats for its usage in a given context.[6] A problem is that sellers lie, they may be mistaken, one or both sides overlook side consequences for usage in a given context, or some unknown unknown affects the actual outcome.

Discussions of the value of patent rights have taken Arrow's information paradox into account in their evaluations.[7] The theory has been the basis for many later economic studies.[8] These include theories that pre-patent innovation can be carried out only by a single firm.[9][10]

See also


  1. 1 2 Takenaka, Toshiko (2008). Patent Law and Theory: A Handbook of Contemporary Research. Research Handbooks in Intellectual Property. Edward Elgar Publishing. pp. 4–5. ISBN 978-1-84542-413-8.
  2. Arrow, Kenneth J. Economic Welfare and the Allocation of Resources for Invention, in The Rate and Direction of Inventive Activity, 609 (Nat’l Bureau of Econ. Research ed. 1962).
  3. 1 2 Liivak, Oskar. The (Relatively) Easy Case for Patents on Inventions. (2012). Retrieved August 7, 2014.
  4. Leppälä, Samuli, Cardiff University, Arrow's Paradox and Unprotected Markets for Information. (2013) Retrieved August 7, 2014.
  5. Gerben Bakker, London School of Economics and Political Science. Trading Facts: Arrow’s Fundamental Paradox and the Origins of Global News Networks in: Peter Putnis, Chandrika Kaul and Jürgen Wilke eds., International Communication and Global News Networks: Historical Perspectives. (New York, Hampton Press / International Association for Media and Communication Research, 2011), 9-54. Winner of the Business History Conference’s / Alfred P. Sloan Foundation’s Ralph Gomory Article Prize 2013. Retrieved August 7, 2014.
  6. Burstein, Michael J. Exchanging Information without Intellectual Property Archived February 2, 2013, at the Wayback Machine.. Texas Law Review Vol. 91. pp. 227282. Retrieved August 7, 2014.
  7. Thambisetty, Sivaramjani. Patents as Credence Goods. Oxford Journal of Legal Studies, Vol. 27, No. 4 (2007), pp. 707–740. Retrieved August 7, 2014.
  8. Dosi, Giovanni, et al. Information, Appropriability, and the Generation of Innovative Knowledge Four Decades after Arrow and Nelson: An Introduction. Oxford Journal of Industrial and Corporate Change. (2006) Online ISSN 1464-3650. Retrieved August 7, 2014.
  9. Bar-Gill, Oren and Gideon Parchomovsky Intellectual Property Law and the Boundaries of the Firm. Harvard John M. Olin Center for Law, Economics and Business. June, 2004. ISSN 1045-6333. Retrieved August 7, 2014.
  10. King, Andrew and Karim R. Lakhani. Using Open Innovation to Identify the Best Ideas. MIT Sloan Management Review Magazine: Fall 2013. September 11, 2013. Retrieved August 7, 2014.


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