Trade Secrets Protection and Cost Structure

We examine the impact of the risk of rival predation arising from a firm’s inability to protect trade secrets on cost elasticity. The empirical setting we use is the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by US state courts over the 1977 to 2011 period, which introduces a plausibly exogenous variation that increases the protection of trade secrets. The results show that the recognition of IDD is associated with an increase in cost elasticity in firms headquartered in IDD recognition states relative to those in non-affected states, and these results are stronger for firms with higher demand uncertainty and greater financial risk, firms facing more intense competition, and firms with greater employee mobility risk. Taken together, these results highlight the strategic value of maintaining fixed resources when there is weaker protection of trade secrets.