Endogenous Strength of Intellectual Property Rights

In recent empirical work, institutions have been shown to explain a significant share of the differences in cross-country accumulation, productivity, and output levels. The key institution that determines sustained development in R&D based growth models is the strength of intellectual property rights, which have thus far been assumed to be exogenous. In this paper we endogenize the strength of the intellectual property rights institutions to study how incentives to protect and exploit property rights affect economic growth. Our model explains endogenous differences in the strength of intellectual property rights across countries and highlights development thresholds that are related to the quality of such property rights. We show that market size is a crucial determinant of the existence and high quality of such institutions. In addition we find that the endogenous determination of the strength of intellectual property rights generates multiple equilibria and an institutional development threshold that must be overcome if an economy is to have strong institutions and rapid growth in the long run. This result is in line with the observed transition of early/small economic communities with common property laws to mature nation states with large institution-based societies.€+•