Patents versus rewards: the implications of production inefficiency

Bagchi Aniruddha () and Arijit Mukherjee
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Bagchi Aniruddha: 15617Kennesaw State University, Kennesaw, USA

German Economic Review, 2021, vol. 22, issue 2, 215-234

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.

Keywords: Patent; Tax; Welfare (search for similar items in EconPapers)
JEL-codes: D43 H25 L13 O34 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/ger-2019-0092

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