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Licensing vs. Litigation: Effect of the Legal System on Incentives to Innovate

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  • Reiko Aoki

    (Department of Economics, State University of New York at Stony Brook)

  • Jin-Li Hu

    (Department of Industrial Economics, Tamkang University, Taiwan)

Abstract

With uncertain scope of patent protection and incomplete enforcement, the effective strength of patent protection is determined by the legal system. We analyze how the legal system effects the incentives of firms to innovate, taking into account possibilities of strategic licensing and litigation to deter infringement. The legal regime that induces licensing provides incentives to exert R&D effort while preserving ex- post efficiency. However the ex-ante socially optimal patent-legal system depends on the technological opportunities available to the society. We also show that change from the American to English rule of legal cost allocation does not alter our results in a fundamental way.

Suggested Citation

  • Reiko Aoki & Jin-Li Hu, 1996. "Licensing vs. Litigation: Effect of the Legal System on Incentives to Innovate," Industrial Organization 9612002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpio:9612002
    Note: Type of Document - postscript and pdf files; prepared on IBM PC ; to print on PostScript or any printer supported by Acrobat; pages: 25 ; figures: included
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    References listed on IDEAS

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