Endogenous Recombinant Growth Through Market Production of Knowledge and Intellectual Property Rights

The legal monopoly granted by the patent system has often been criticized for its inefficiency, which is exacerbated by the peculiarities of knowledge as a public good. In this paper we aim at studying more deeply the latter concern. Hence we build a model in which monopolistic exploitation does not arise, but the property rights granted from patents still give rise to serious drawbacks. We build on the recombinant growth model of Weitzman (1998), which provides a stylized but clear description of the formation of knowledge externalities. In our framework a benevolent government buys immediately new patents in a competitive market and releases their contents for free. It is shown that inefficiency nevertheless arise and welfare can be improved by correcting the market price through a tax-subsidy scheme. We characterize the (asymptotic) steady state equilibrium, and some properties of the transitional path. We show that if certain conditions are met, then the economy will converge to its (asymptotic) balanced growth path, and along such a path growth will be independent of the government policy; conversely, transition dynamics and the capital to knowledge ratio are affected by the choice of the policy parameter. We then quantitatively analyze the effect of different policy interventions on welfare, and show that stricter (weaker) tax (appropriability) regimes lead to higher social welfare and a strictly positive tax regime may be required to avoid stagnation