DP9351 Rational parasites

Author(s): Jean-Pierre Benoit, Roberto Galbiati, Emeric Henry
Publication Date: February 2013
Keyword(s): experiment, investment, patent, repeated games
JEL(s): C91, K0, O3
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9351

Understanding the impact of legal protection on investment is of major importance. This paper provides a framework for addressing this issue, and shows that investment may actually be higher in the absence of legal protection. Focusing on the application to innovation, in an environment where an innovator (the host) repeatedly faces the same imitators (parasites), we show that investment can take place even without patent protection, as parasites limit their imitation to preserve the innovator's incentives to invest. We show further that an innovator might be more active without legal protection: it is forced to increase its investment to keep the parasites satisfied and, thus, cooperative. We provide experimental evidence consistent with the theoretical results: in the experiment, investment levels with and without legal protection are comparable, and sometimes greater without patents. Our framework is general enough to apply to other situations such as investment in developing countries, commons' management and long-distance trade.