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Abstract
This paper develops a model of heterogeneous producers to examine the
economic causes of IPR infringement and its consequences for the welfare of the interest
groups and the pricing and adoption of a new technology (i.e., a genetically modified
seed) in the context of a small open developing economy. Enforcement of IPRs, and
pricing and adoption of the new technology are modeled as a sequential game between
the government that enforces the IPRs, a foreign innovating firm that prices the new
technology, and the developing country’s producers who make the production and
cheating decisions. Analytical results show that complete deterrence of IPR infringement
is not always economically optimal. IPR infringement affects the welfare of the interest
groups and has important ramifications for the pricing and adoption of the new
technology. The quantitative nature of the results depends critically on the existing
labeling regime. The analysis also shows that differences in the level of IPR enforcement
provide an alternative justification for (and explanation of) differences in the pricing of
the new technology in different countries around the world – a strategy adopted by
leading innovators in the sector. Finally, the results suggest that if the penalties for IPR
infringement under the TRIPs agreement follow the custom of retaliatory sanctions under
the GATT, enforcement of IPRs will remain imperfect and the innovators’ ability to
obtain value for their biotech traits will still be limited.