Trade Secret Protection in a Developing Economy

Surveys of U.S. based multinational enterprises reveal that trade secret misappropriation by current and former employees remains a substantial impediment to conducting business in emerging markets. In this paper, I examine the consequences of strengthening legal protection against this employment related trade secret misappropriation in an open economy context. I develop a general equilibrium model featuring heterogenous firms that differ in both standard productivity and the degree to which they must expose employees to their trade secrets. To pre- vent employees from leaking trade secrets, firms offer an incentive compatible wage based on their individual exposure, and the common level of legal protection. Entry selection generates an endogenous distribution of firm specific wages and positive unemployment in equilibrium. Simulations of the calibrated model show that stronger legal protection stimulates multinational investment and increases aggregate productivity. However, these gains are distributed unevenly across workers, and many are worse-off following this reform