National patents, innovation and international agreements

One of the most contentious issues arising from the Uruguay Round of trade negotiations was the attempt to harmonize patent policy. However, previous theoretical models have failed to provide a clear rationale for the coordination of patent policy, indeed they imply that world welfare may decline as a result of coordination. This paper argues that the conclusions of previous studies have been derived from definitions of patents that neglect to specify their duration. As a consequence, the monopoly distortion associated with patents has been overemphasized. In contrast, this paper models the choice of the hazard of imitation under a patent as a policy variable. This allows for a more detailed analysis of the determinants of patent policy in an international context, and isolates two externalities when countries set patent policy independently. These externalities arise from a free-riding incentive (policy competition) and the international spillovers from an innovation. Since these considerations influence the patent strength in both developed and developing countries, patents set on a national basis are inefficient from a global perspective. This provides an economic rational for international coordination of patent policy.