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This paper analyzes the setting of national patent policies in the global economy. In the standard model with free trade and social-welfare-maximizing governments ? la Grossman and Lai (2004), cross-border positive policy externalities induce individual countries to select patent strengths that are weaker than is optimal from a global perspective. The paper introduces three new features to the analysis: trade barriers, firm heterogeneity in terms of productivity and political economy considerations in setting patent policies.
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