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

Author

Listed:
  • 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.

Suggested Citation

  • Reiko Aoki & Jin-Li Hu, 1996. "Licensing vs. Litigation: Effect of the Legal System on Incentives to Innovate," Industrial Organization 9612002, University Library of Munich, Germany.
  • 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 listed on IDEAS

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    1. Katharine E. Rockett, 1990. "Choosing the Competition and Patent Licensing," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 161-171, Spring.
    2. 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 157-179, January.
    3. Katz, Michael L & Shapiro, Carl, 1987. "R&D Rivalry with Licensing or Imitation," American Economic Review, American Economic Association, vol. 77(3), pages 402-420, June.
    4. 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.
    5. 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.
    6. Paul Klemperer, 1990. "How Broad Should the Scope of Patent Protection Be?," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 113-130, Spring.
    7. 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 280-280, June.
    8. Choi, Jay Pil, 1998. "Patent Litigation as an Information-Transmission Mechanism," American Economic Review, American Economic Association, vol. 88(5), pages 1249-1263, December.
    9. Michael J. Meurer, 1989. "The Settlement of Patent Litigation," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 77-91, Spring.
    10. 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 837-858, October.
    11. Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-585, May.
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    Citations

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    Cited by:

    1. Kou Zonglai & Zhang Jian, 2007. "Endogenous licensing in cumulative innovation," Psychometrika, Springer;The Psychometric Society, vol. 2(3), pages 424-457, July.
    2. 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.
    3. Corinne Langinier, 2005. "Using patents to mislead rivals," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 520-545, May.
    4. Choi, Jay Pil, 1998. "Patent Litigation as an Information-Transmission Mechanism," American Economic Review, American Economic Association, vol. 88(5), pages 1249-1263, December.

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    • L - Industrial Organization

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