Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, May 23, 2011

Intellectual Property Rights, Institutional Quality and Economic Growth

Posted by D. Daniel Sokol

Irem Demirkan, International Business and Strategy Group, College of Business Administration, Northeastern University Sebahattin Demirkan, Bentley University - Department of Accountancy address Intellectual Property Rights, Institutional Quality and Economic Growth.

ABSTRACT: We consider the role of intellectual property rights (IPRs) in a Schumpeterian growth model in which patent holders face the threats of profit loss due to imitation and complete replacement due to successful outside innovation. In this setting stronger IPR enforcement has both imitation and innovating deterring effects. We disaggregate IPR policies by distinguishing between two features of IPRs protection. The first is the intensity of IPR enforcement, which is determined by the fraction of resources allocated to innovation and imitation deterrence. The second is the quality of the IPR regime, which reflects the ability of the IPR regime to shift enforcement resources away from innovation deterrence and towards imitation deterrence. We find that an increase in the quality of the IPR regime unambiguously promotes growth. However, an increase in the intensity of IPR enforcement increases growth if and only if the threat of imitation is above a threshold level. We show that there exists a growth-maximizing level of IPR enforcement intensity, which is decreasing in institutional quality. We also show that countries with sufficiently low quality institutions will be trapped in a no-growth boundary equilibrium, regardless of the intensity of IPR enforcement. Simulation exercises indicate that welfare-maximizing policies follow patterns similar to growth-maximization policies. The economy can have too much or too little IPR enforcement intensity. For countries with sufficiently low institutional quality, welfare is maximized by completely foregoing IPR protection and eliminating monopolistic markets, even though positive growth may be feasible with appropriate intensity of IPR enforcement.

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