| Summary: | "The conventional economic justification for global IP treaties begins from the premise that nation-states, if left to their own devices, will rationally underinvest in innovation incentives such as IP laws, grants, tax credits, and prizes (the "underinvestment hypothesis"). Under this account, nation-states will free-ride on each other's knowledge production unless they find some solution to their collective-action problem. The solution that nation-states have struck upon is international IP law: IP treaties harmonize domestic laws and thus ensure a baseline level of investment in knowledge production (the "harmonization hypothesis"). And since states are obligated by treaty to adopt strong IP laws, they steer away from tools such as grants, credits, and prizes that are potentially more efficient mechanisms for encouraging innovation. Previous authors have adopted this logic while lamenting its implications: IP appears to be a necessary evil in an interconnected world - necessary to solve the free-rider problem; lamentable because it results in sizeable deadweight losses. This account of IP treaties is informative but incomplete. The underinvestment hypothesis is robust only to the extent its assumptions about the nature of knowledge goods and the behavior of nation-states are accurate. But not all knowledge goods are global public goods, and nation-states have motivations to invest in knowledge production that the conventional account fails to capture. More fundamentally, the harmonization hypothesis rests on a misapprehension of the link between global and domestic IP laws. States can comply with IP treaties while relying primarily on non-IP innovation incentives and non-price mechanisms for allocating knowledge goods within their own borders. In the starkest case, a government body subsidizes production of a knowledge good through prizes or grants, takes title to the resulting IP rights, and then licenses the knowledge good to the government of another nation-state. The government in the consumer nation-state has the option of financing royalty payments to the producing country through taxation and then distributing the knowledge good to its own citizens at marginal cost. In this stylized example, IP law operates only at the international - not the domestic - level. While in practice states generally choose to rely on IP at least to some extent, we show that many real-word arrangements resemble the stylized example in important respects. Our more nuanced account does not imply that international IP laws are misguided; rather, our analysis highlights the specific function that IP treaties serve. Most significantly, international IP laws establish a framework for setting the size of payments from states that consume knowledge goods to states that produce those knowledge goods. At the same time, international IP laws allow each signatory state to choose its own mix of innovation incentives and its own method of allocating access to knowledge goods within its own borders. Put differently, the international IP regime does not relegate nation-states to a subordinate position in the production of knowledge goods; rather, it creates a framework in which nation-states still are dominant players in the innovation game."
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