Patents versus rewards: the implications of production inefficiency

Bagchi, Aniruddha; Mukherjee, Arijit

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.

Citation

Bagchi, A., & Mukherjee, A. (2021). Patents versus rewards: the implications of production inefficiency. German Economic Review, 22(2), 215-234. https://doi.org/10.1515/ger-2019-0092

• Journal Article Type: Article
• Acceptance Date: Oct 10, 2020
• Online Publication Date: Oct 29, 2020
• Publication Date: May 1, 2021
• Deposit Date: Oct 12, 2020
• Publicly Available Date: Oct 30, 2022
• Journal: German Economic Review
• Print ISSN: 1465-6485
• Electronic ISSN: 1468-0475
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 22
• Issue: 2
• Pages: 215-234
• DOI: https://doi.org/10.1515/ger-2019-0092
• Keywords: Economics and Econometrics
• Public URL: https://nottingham-repository.worktribe.com/output/4959736