The Political Economy of Patent Buyouts

ABSTRACT Incentivizing innovation through buyouts may alleviate the social costs associated with patent power, but the political economy and feasibility of this potentially important financing mechanism have been understudied. We study an international setting of countries with different innovation and financing capabilities, and where financing governments rely on taxes to fund buyouts and care about the electoral popularity of their decisions. Subsequent distributional conflict arises between countries as some may benefit from the now‐public knowledge without contributing equally to financing, whereas taxpayers within a country may disagree over the desired extent of tax financing for buyouts. We show that these conflicts reduce the feasibility of buyouts relative to patents, identify the conditions under which this harms global welfare, and discuss possibilities for overcoming these constraints. The international public good and public financing dimensions of buyouts emerge as essential for understanding their potential to supplant patents and to improve social welfare.