This paper studies how the strength of intellectual property rights (IPRs) affects investments in biological innovations when the value of an innovation is stochastically reduced to zero because of the evolution of pest resistance. We frame the problem as a research and development (R&D) investment game in a duopoly model of sequential innovation. We characterize the incentives to invest in R&D under two competing IPR regimes, which differ in their treatment of the follow-on innovations that become necessary because of pest adaptation. Depending on the magnitude of the R&D cost, ex ante firms might prefer an intellectual property regime with or without a "research exemption" provision. The study of the welfare function that also accounts for benefit spillovers to consumers—which is possible analytically under some parametric conditions, and numerically otherwise—shows that the ranking of the two IPR regimes depends critically on the extent of the R&D cost.
This working paper was published as Yerokhin, Oleg and GianCarlo Moschini, "Intellectual Property Rights and Crop-Improving R&D under Adaptive Destruction," Environmental and Resource Economics 40 (2008): 53–72, doi:10.1007/s10640-007-9140-5.
Available at: http://works.bepress.com/giancarlo-moschini/20/