Keeping Organizational Secrets: Protective Institutional Mechanisms and their Costs

Abstract

The notion that firms generate rents from proprietaty knowledge is widely accepted. However, the mechanisms that firms, as institutions, can differentially deploy to protect their knowledge form appropriation by rivals are not well understand. This paper examines three broad classes of ‘protective mechanisms’ that firms can deploy to keep their knowledge secret: rules, compensation schemes, and structural isolation. The paper concludes that keeping organizational secrets through the deployment of protective mechanisms is both difficult and costly. Economizing considerations can therefore be expected to bear strongly on this aspect of firm organization.