Implications of Uncertainty and Spillovers for Access and Benefit Sharing Agreements

One of the objectives of the 1992 Convention on Biological Diversity is to create access to genetic resources and benefit-sharing (ABS) systems that incorporate the environmental, social, and economic aspects of sustainable development. Under the Convention, governments have sovereignty over their genetic resources but also the responsibility of using them sustainably. This provision is particularly relevant for biologically-abundant developing countries as it offers a direct means of reducing the financial pressures against conservation of ecosystems and natural habitats, particularly in light of recent. This paper examines the impacts of a benefit-sharing system involving royalties and governmental ownership of genetic resources in a two-firm research and development (R&D) market with uncertainty and information spillovers. Royalties are shown to reduce the research output of the taxed firm, which results in much lower expected government revenues when the research output of a competing rm is a strategic subsitute relative to when it is a strategic complement. Further, taxation alone is generally inferior to a combination of taxation/subsidization of successful products and research costs. The paper shows that subsidization rather than taxation of successful products may even be optimal under particular types of uncertainty.