Yerokhin, Oleg; Moschini, GianCarlo

Environmental and Resource Economics Vol. 40 (2008): 53-72. (Originally published as CARD Working Paper #07-WP 449)

This paper studies how the strength of intellectual property rights (IPRs) affects investments in biological innovations when the value of an innovation is stochastically reduced to zero because of the evolution of pest resistance. We frame the problem as a research and development (R&D) investment game in a duopoly model of sequential innovation. We characterize the incentives to invest in R&D under two competing IPR regimes, which differ in their treatment of the follow-on innovations that become necessary because of pest adaptation. Depending on the magnitude of the R&D cost, ex ante firms might prefer an intellectual property regime with or without a ﾓresearch exemptionﾔ provision. The study of the welfare function that also accounts for benefit spillovers to consumersﾗwhich is possible analytically under some parametric conditions, and numerically otherwiseﾗshows that the ranking of the two IPR regimes depends critically on the extent of the R&D cost.

Keywords: Intellectual property rights, patents, biological resistance, Markov perfect equilibrium, research exemption, R&D, sequential innovation.

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