Towards a Theory of Socially Valuable Imitation with Implications for Technology Policy.

We present a novel theory of socially optimal initation in a model exhibiting strategic interaction between innovating and imitating firms. We demonstrate how the socially optimal innovation and imitation intensities can be implemented with subsidy policies, but not with patent policy, if the necessary public funds can be raised without causing deadweight losses. We show the impact of patents on innovation and imitation in a novel way. We characterize the relationship between patent and subsidy policies at the optimal mix of technology policies and indicate how the optimal patent policy is related to the social costs of subsidies and substitutability between policy instruments.