The theory of the firm asks when an intermediate good should be produced in-house and when it should be purchased on the market from an upstream supplier. In technology-intensive industries, one of the central intermediate goods is information or innovation. The question thus becomes which stages of the inventive process should be integrated in a single firm and which should be divided among different firms and traded on the market. The theoretical investigation of the optimal boundary between firm and market cannot be carried out in a legal vacuum. Ideally, only economic considerations should affect the "make or buy" decision. In practice, however, law imposes an important constraint on the economic balance between firms and markets.

We focus on the property rights theory of the firm pioneered by Sanford Grossman, Oliver Hart, and John Moore and applied to the innovation context by Philippe Aghion and Jean Tirole. Aghion and Tirole show both when integration is efficient and when nonintegration is efficient. Their analysis realistically assumes that "the exact nature of the innovation is ill-defined ex ante and the two parties cannot contract for delivery of a specific innovation." But Aghion and Tirole also assume that the contract can specify "the allocation of the property right on any forthcoming innovation."

Implicit in Aghion and Tirole's framework is the notion that property rights in the innovation are legally recognized. Is it necessarily the case that innovation is protected by property rights? The assumption that property rights in the intermediate good are legally recognized is, in many contexts, completely innocuous. Obviously, the law recognizes property rights in the proverbial widget. But this key assumption is not innocuous in the innovation context. Legal doctrine is continuously struggling to define what classes of information are worthy of property right protection.