Abstract
This paper examines the effect of campaign contributions on patent policy, welfare, and innovation using a fully-endogenous quality-ladder model. Assuming two types of households, where one type holds patents and the other does not, we analyze political conflicts between the two groups. Our analysis shows campaign contributions increase the rate of innovation to an excessive level from the viewpoint of social welfare when the innovation-maximizing patent policy is sufficiently strong. This result is important because it implies that the rate of innovation distorted by campaign contributions can be too high from the viewpoint of social welfare.
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Notes
According to the OECD (2013), the proportions of research and development throughout the world are 33.5% in the United States, 14.6% in China, 11.6% in Japan, 7.1% in Germany, 4.4% in Korea, 4.1% in France, and 3.7% in the United Kingdom.
The quasi-linear preference suggests that the utility of households is measured in units of homogenous goods. Although this is a relatively strong assumption, it allows us to derive the political-equilibrium patent policy with ease. We will examine this point in Sect. 4.2.
Considering the consumption index given by (9), the price index of quality-enhancing goods is expressed as
$$ P_{q,t} = \exp \left( {\int\limits_{0}^{1} {\log p\left( j \right)} {\text{d}}j} \right). $$In the case of finite patent length, the relationship between the rate of innovation and patent policy is derived as an implicit function. This consequence makes the analysis more complicated. As for the difficulty caused by the assumption of finite patent length, see Iwaisako and Futagami (2013).
For details of derivation, see Grossman and Helpman (1991, Chap.4).
In contrast, the first term of (26) tends to be negative when the economy has a larger population, \( L \). In this case, each Type-I household holds a small amount of assets. Therefore, they do not prefer stronger patent protection.
The objective function of the government is also assumed to be quasi-linear. This implies that the utility of the government is measured in units of homogenous goods.
It may be more realistic that Type-I households negotiate with the government in every period to make political contributions. However, this setting makes it difficult to formulate the negotiation process.
We could derive the efficient bargaining outcome by solving a different constrained maximization problem,
$$ \hbox{max} \;sU\left( {I,\beta } \right) - C\;{\text{subject}}\;{\text{to}}\;\left( {1 - \zeta } \right)W\left( \beta \right) + \zeta C \ge W_{0} , $$for some value of \( W_{0} \). The first order condition of this problem is exactly the same as (33).
To derive a more general solution, we must add some assumptions and calculate the total surplus of the government and patent holders. See Chu’s (2008) Appendix A for details.
In this case, we can easily confirm \( \widetilde{W}\left( {\beta^{C} ,\overline{C} } \right) \ge \widetilde{W}\left( {\beta^{*} ,0} \right) = \left( {1 - \zeta } \right)W\left( {\beta^{*} } \right) \), which implies that the government’s gain when the two agents engage in efficient bargaining is larger than the gain without bargaining. Therefore, this inequality represents that the government has an incentive to strengthen its patent protection as a result of the bargaining outcome.
We use the constraint given in footnote 12 and \( W_{0} = \left( {1 - \zeta } \right)W\left( {\beta^{*} } \right) \) to derive (35).
Similar to footnote 14, we can confirm \( sU\left( {I,\beta^{C} } \right) - \underline{C} \ge sU\left( {I,\beta^{*} } \right) \), which represents that Type-I households have an incentive to contribute as a result of the bargaining outcome.
Our model is based on the quality-ladder model developed by Grossman and Helpman (1991, Chap. 4). Their model has no transitional dynamics, which implies that an economy jumps immediately to its steady state in their model.
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Acknowledgements
I thank the Editor-in-Chief Yoshiro Higano, anonymous reviewers, and audiences at several seminars for their helpful comments. In addition, this work was supported by JSPS KAKENHI Grant Number 25380290.
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Ikeshita, K. Campaign contributions and innovation in a fully-endogenous quality-ladder model. Asia-Pac J Reg Sci 2, 139–157 (2018). https://doi.org/10.1007/s41685-018-0080-6
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DOI: https://doi.org/10.1007/s41685-018-0080-6