Patent Valuation under Fragile Institutional Enforcement: A Continuous-Time Markov Approach

Srikanth Pai (), Akila Hariharan and Naveen Srinivasan ()
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Srikanth Pai: (Corresponding author), Madras School of Economics, Gandhi Mandapam Road, Behind Government Data Centre, Kotturpuram, Chennai, 600025, India.
Akila Hariharan: Madras School of Economics, Gandhi Mandapam Road, Behind Government Data Centre, Kotturpuram, Chennai, 600025
Naveen Srinivasan: Madras School of Economics, Gandhi Mandapam Road, Behind Government Data Centre, Kotturpuram, Chennai, 600025

Working Papers from Madras School of Economics,Chennai,India

Abstract: We build a tractable model that links institutional dynamics with the private value of innovation. Our approach differs from much of the existing literature in that an inventor does not retain a perpetual monopoly over its use, and the cash flows generated from a new idea are uncertain. In our framework the relevant dimension of institutional quality is enforcement strength. We model institutional strength as a two-state continuous-time Markov chain. This makes the cash flows from innovation stochastic and state-dependent, and hence the incentive to innovate varies with the strength of enforcement regime. Countries alternate between periods of strong and weak enforce-ment, reflecting irregular political and legal events such as reforms, leadership changes, or crises. Our model shows how institutional fragility can alter the incentive to innovate and connects institutional dynamics with cross-country differences in standard of living.

Keywords: institutions; innovation; patents; continuous-time Markov chain; economic growth (search for similar items in EconPapers)
JEL-codes: O31 O33 O34 O43 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2026-01
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