A Theory of Trade Secrets in Firms

This article provides a simple theoretical model of trade secrets in hierarchical firms. A crucial assumption is that each manager has access to trade secrets pertaining to his own hierarchical level as well as to all lower levels. The article explores some implications of this assumption for optimal degree of trade secrets accumulation and protection as well as for the wage structure in firms. In addition, the model implies that managers may have an incentive to overpay their subordinates and protect their firms’ trade secrets too much.