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Licensing vs. Litigation: Effect of the Legal System on Incentives to Innovate

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Author Info

  • Reiko Aoki

    (Department of Economics, State University of New York at Stony Brook)

  • Jin-Li Hu

    (Department of Industrial Economics, Tamkang University, Taiwan)

Abstract

With uncertain scope of patent protection and incomplete enforcement, the effective strength of patent protection is determined by the legal system. We analyze how the legal system effects the incentives of firms to innovate, taking into account possibilities of strategic licensing and litigation to deter infringement. The legal regime that induces licensing provides incentives to exert R&D effort while preserving ex- post efficiency. However the ex-ante socially optimal patent-legal system depends on the technological opportunities available to the society. We also show that change from the American to English rule of legal cost allocation does not alter our results in a fundamental way.

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File URL: http://128.118.178.162/eps/io/papers/9612/9612002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 9612002.

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Length: 25 pages
Date of creation: 13 Dec 1996
Date of revision:
Handle: RePEc:wpa:wuwpio:9612002

Note: Type of Document - postscript and pdf files; prepared on IBM PC ; to print on PostScript or any printer supported by Acrobat; pages: 25 ; figures: included
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References

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  1. Katz, Michael L & Shapiro, Carl, 1987. "R&D Rivalry with Licensing or Imitation," American Economic Review, American Economic Association, vol. 77(3), pages 402-20, June.
  2. Michael J. Meurer, 1989. "The Settlement of Patent Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 77-91, Spring.
  3. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers 392, C.E.P.R. Discussion Papers.
  4. Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-85, May.
  5. Reiko Aoki & Jin-Li Hu, 2003. "Time Factors of Patent Litigation and Licensing," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 159(2), pages 280-, June.
  6. Suzanne Scotchmer & Jerry Green, 1990. "Novelty and Disclosure in Patent Law," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 131-146, Spring.
  7. Choi, Jay Pil, 1998. "Patent Litigation as an Information-Transmission Mechanism," American Economic Review, American Economic Association, vol. 88(5), pages 1249-63, December.
  8. Hylton, Keith N, 1993. "Asymmetric Information and the Selection of Disputes for Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 22(1), pages 187-210, January.
  9. Katharine E. Rockett, 1990. "Choosing the Competition and Patent Licensing," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 161-171, Spring.
  10. Hause, John C, 1989. "Indemnity, Settlement, and Litigation, or I'll Be Suing You," The Journal of Legal Studies, University of Chicago Press, vol. 18(1), pages 157-79, January.
  11. Horstmann, Ignatius & MacDonald, Glenn M & Slivinski, Alan, 1985. "Patents as Information Transfer Mechanisms: To Patent or (Maybe) Not to Patent," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 837-58, October.
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Citations

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Cited by:
  1. Ottoz Elisabetta & Cugno Franco, 2012. "Different Rules of Legal-Cost Allocation and Patent Hold-Up," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201216, University of Turin.
  2. Choi, J.P., 1997. "Patent Litigation as an Information Transmission Mechanism," Discussion Paper 1997-17, Tilburg University, Center for Economic Research.
  3. Langinier, Corinne, 2005. "Using Patents to Mislead Rivals," Staff General Research Papers 11483, Iowa State University, Department of Economics.
  4. Kou Zonglai & Zhang Jian, 2007. "Endogenous licensing in cumulative innovation," Psychometrika, Springer, vol. 2(3), pages 424-457, July.

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