Abstract
It is believed that if there is no informational asymmetry between firms and the government, firms could be remunerated for innovation using optimal taxation rather than patents. We show that under reasonable conditions (such as the government’s inability to customise the tax rate for each firm), patent protection is preferable to a tax/subsidy scheme if the marginal costs of the imitators are sufficiently higher than that of the innovator. Otherwise, the tax/subsidy scheme is preferable. These results hold under Cournot and Bertrand competition with product differentiation, but not for the case of Bertrand competition with homogeneous products. We rationalise these findings as the results of a trade-off between the distortions induced by monopoly under patents and production inefficiency under the tax/subsidy scheme.
Funding statement: Aniruddha Bagchi gratefully acknowledges financial support from the Bagwell Center for the Study of Markets and Economic Opportunity at Kennesaw State University for this paper.
Acknowledgment
We thank two anonymous referees of this journal for their helpful comments and suggestions, which helped to improve the paper significantly. We also thank Sugata Marjit, Timothy Mathews, Matthew Mitchell and Peter Neary for helpful discussions. The usual disclaimer applies.
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Articles in the same Issue
- Frontmatter
- Original Articles
- Skimming through search
- Do political parties matter? Evidence from German municipalities
- In-group, out-group effects in distributional preferences: the case of gender
- Patents versus rewards: the implications of production inefficiency
- Income-(in)dependent equivalence scales and inequality measurement
Articles in the same Issue
- Frontmatter
- Original Articles
- Skimming through search
- Do political parties matter? Evidence from German municipalities
- In-group, out-group effects in distributional preferences: the case of gender
- Patents versus rewards: the implications of production inefficiency
- Income-(in)dependent equivalence scales and inequality measurement