When tournament effect is negative, under complete information, whether patent protection increases the incentive for R&D is ambiguous. It depends on the extent of spillover of the new technology. In particular if that amount is less than a threshold value then patent protection increases the incentive for R&D, otherwise it does not. This note considers incomplete information framework where the spillover parameter is private information. In this framework it is shown that there are situations where patent protection unambiguously increases incentive for R&D. This happens if the distribution function of the spillover parameter is sufficiently skewed and the cost of doing research is sufficiently high even when tournament effect is negative.
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There is a subtle difference between imitation or invention around and spillovers. Imitation involves deliberate and active pursuit of coming up with a similar though may not be identical R&D result, while spillover does not result from conscious efforts. The technology invented/innovated by a particular firm might be fully or partially appropriated by its rival through certain channels e.g. through movement of personnel across firms. Though in this note we are considering spillover, this can be substituted by imitation as long as imitation is costless since for costless imitation every firm will try to replicate the R&D result of its contender to the highest extent possible. Indeed in this note when we refer to spillover, we are actually considering costless imitation.
This basically implies that when a firm can receive a large amount of spillover benefit from its rival, it will lack motivation to invest in R&D.
The net expected gain from doing research is the gross expected gain net of the cost of doing research.
For detailed derivation see Chatterjee et. al. (2008).
In Chatterjee et. al. it is shown that T(x; x) is strictly falling in x.
This can be routinely calculated for standard Cournot model involving asymmetric costs for firms.
The payoffs are taken from Chatterjee et al. (2018).
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We are greatly indebted to two anonymous referees of this journal and Tarun Kabiraj for very productive and helpful comments and suggestions. However, the usual disclaimer applies.
Srobonti Chattopadhyay and Rittwik Chatterjee contributed equally to this paper.
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Chattopadhyay, S., Chatterjee, R. Patent Protection and R&D Incentives Under Incomplete Information. J. Quant. Econ. 17, 699–705 (2019). https://doi.org/10.1007/s40953-018-0153-4
- R&D incentives
- Cournot duopoly
- Incomplete information
- Patent protection
- Tournament effect