The political economy of compulsory licensing: democracy and regulatory threat in public health

Research on regulation highlights firms’ voluntary efforts to regulate their behavior without explaining how political institutions drive those efforts. This paper argues that democratic governments are more credibly committed than authoritarian regimes to regulatory interventions, leading firms to self-regulate. I develop a model showing that democracies signal their willingness to secure public access to patented medicines, as both regulators and lawmakers face domestic political pressures. To test the theory, I collect a new data set on compulsory licensing legislation and examine when pharmaceutical companies reach licensing agreements on AIDS drugs in global markets. I find that foreign firms are more likely to license the drugs voluntarily when democracies legalize compulsory licensing. I also find that democracies legalize compulsory licensing more promptly than autocracies, as legislators meet the demand for drugs by holding regulatory authorities accountable during public health emergencies. Parliamentary oversight during the AIDS crisis in South Africa supports these findings. The results illustrate how political participation by civil society influences business-government relations in regulation.