Discussion Paper

No. 2016-51 | December 15, 2016
Patent Buyout in a Model of Endogenous Growth


This paper considers the prospect of a government patent buyout in a model of endogenous growth. To this end, the author modifies a standard quality ladder growth model by incorporating possibility of imitation, and rent protection activities (RPAs) by the innovator. The government finances the buyout by imposing a per unit sales-tax on the goods. The author shows that in this set-up, patent buyout by the government can lead to higher level of welfare without lowering an economy's growth rate along the balanced path. He highlights two sources of welfare improvement: elimination of monopoly pricing, and reduction in RPAs.

JEL Classification

O31 O34 O38

Cite As

Ravi Radhakrishnan (2016). Patent Buyout in a Model of Endogenous Growth. Economics Discussion Papers, No 2016-51, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-51


Comments and Questions

Anonymous - Referee Report 1
January 16, 2017 - 08:05

This paper is using a standard R&D-based model with vertical innovations to assess results that are obtained within two scenarios: Results which are obtained in the standard case where patents are given to innovators providing them with an exclusive right on the production and sale of protected goods (Grossman and ...[more]

... Helpman, 1991); and results that follow from a different strategy, i.e. incorporating the possibility of imitation, and rent protection activities. A welfare analysis is conducted showing that a patent buyout strategy by the government can lead to a better economic outcome.

Overall, I think that the paper is well written. Moreover, its contribution could be interesting. However, I have several comments which I would like the author to address:

1)The author spends too much time on standard (well-known) results. Although, those are required for a comparison with the the "patent buyout" strategy which is the main contribution, I think the paper can be made much shorter. The author should focus on his own contribution.

2)Basically, welfare results obtained with the "patent buyout" strategy are not surprising. The reason is that innovations are put in the public domain and goods are sold on perfectly competitive markets (the monopoly distortion is removed). If this was not the case, some clear explanations on the reasons it might be the case are necessary.

3) Even if the author tries to explain why there is no effect on long-term growth with the "patent buyout" strategy, the paper lacks economic intuitions to address the main reason of this surprising result. Changes in relative prices are insufficient. The author should assess the question of reallocation of resources between sectors and explain why there is a welfare effect and no growth effect. As it stands, it is difficult to understand the mechanisms behind the results.
As a reader, we also need to understand if it is a general result or if it is specific to the model used.

4) The author explains that the "patent buyout" strategy is welfare improving. How is it possible to implement the 1st best optimum in this case? How does the level of growth compare with the two previous cases? Answering these questions would help to clarify both the questions addressed on the problem of resources allocation and long-term growth.

Ravi Radhakrishnan - Response to Referee Report 1
February 08, 2017 - 02:32

Please find attached the author's responses to Referee Report 1

Anonymous - Referee Report 2
February 22, 2017 - 08:06

see attached file