Patent litigation insurance and R&D incentives
A major policy concern regarding patenting activity is related to the actual enforceability of the patents granted by Patent Offices. The risk of facing elevated legal costs to defend patent rights can affect ex-ante incentives to invest in R&D. This paper analyses whether the availability of insurance policies that cover legal expenditures for patent litigation could increase the appropriability of the innovation. We model a situation in which an incumbent innovator is endowed with a valid patent and an entrant imitator can either directly enter the market or try to apply for a patent, hoping that an error will be made by the Patent Office. The incumbent can accommodate the entrant, file a suit to a civil court or offer a settlement agreement. We model the presence of heterogeneity in the risk that the patents will face an error by both patent examiners at Patent Offices and judges at civil court. We analyse the changes in expected profits for the innovator when given the possibility of buying an insurance policy which will cover legal costs in the event of trial. We compare the cases in which (i) coverage is voluntary and the insurer can discriminate perfectly between risky patents; (ii) coverage is voluntary and the insurer cannot discriminate between patents, and (iii) coverage is compulsory. The model highlights a set of peculiar strategic characteristics of insurance for legal expenditures which contribute to singling out the reasons underlying the underdevelopment of this market. We suggest that the crucial reason for such a failure is not adverse selection; consequently, we challenge the benefits of making coverage compulsory.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
When requesting a correction, please mention this item's handle: RePEc:eee:irlaec:v:28:y:2008:i:4:p:272-286. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.