Patents versus rewards: The implications of production inefficiency
Department
School of Accountancy
Document Type
Article
Publication Date
5-1-2021
Abstract
It is believed that if there is no informational asymmetry between firms and the government, firms could be remunerated for innovation using optimal taxation rather than patents. We show that under reasonable conditions (such as the government's inability to customise the tax rate for each firm), patent protection is preferable to a tax/subsidy scheme if the marginal costs of the imitators are sufficiently higher than that of the innovator. Otherwise, the tax/subsidy scheme is preferable. These results hold under Cournot and Bertrand competition with product differentiation, but not for the case of Bertrand competition with homogeneous products. We rationalise these findings as the results of a trade-off between the distortions induced by monopoly under patents and production inefficiency under the tax/subsidy scheme.
Journal Title
German Economic Review
Journal ISSN
14656485
Volume
22
Issue
2
First Page
215
Last Page
234
Digital Object Identifier (DOI)
10.1515/ger-2019-0092