The Economics of Royalty Rates in Plant Breeding

In the seed sector, for some self-pollinated varieties such as wheat, innovative breeders compete directly with self-producing farmers for commercializing their new seed varieties. The use of farm-saved seed (FSS) can reduce breeders' incentive to innovate. Several countries have established different royalty systems for both certified seed and FSS to reduce such inefficiencies. In this article, we develop a theoretical model to compare these different systems. More precisely, we compare six different systems by analyzing their impact on the incentive to innovate, as well as production efficiencies at both the seed and agricultural production levels. We show that royalty systems leading to a certain proportion of FSS are welfare improving. The systems leading the highest total welfare levels are those in which the royalty level on FSS is regulated, i.e., either defined directly by the regulator (French or UK systems) or imposed at the same level of certified seed (Australian system). When all economic effects are taken into account, the Australian system performs better with high research costs. Conversely, with low research costs, the best system is either the French or the UK system, depending on the relative cost of producing FSS vs. certified seed.