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Article

A patent is a legal right to exclude granted by the state to the inventor of a novel and useful invention. Much legal ink has been spilled on the meaning of these terms. “Novel” means that the invention has not been anticipated in the art prior to its creation by the inventor. “Useful” means that the invention has a practical application. The words “inventor” and “invention” are also legal terms of art. An invention is a work that advances a particular field, moving practitioners forward not simply through accretions of knowledge but through concrete implementations. An inventor is someone who contributes to an invention either as an individual or as part of a team. The exclusive right, finally, is not granted gratuitously. The inventor must apply and go through a review process for the invention. Furthermore, a price for the patent being granted is full, clear disclosure by the inventor of how to practice the invention. The public can use this disclosure once the patent expires or through a license during the duration of the patent. These institutional details are common features of all patent systems. What is interesting is the economic justification for patents. As a property right, a patent resolves certain externality problems that arise in markets for knowledge. The establishment of property rights allows for trade in the invention and the dissemination of knowledge. However, the economic case for property rights is made complex because of the institutional need to apply for a patent. While in theory, patent grants could be automatic, inventions must meet certain standards for the grant to be justified. These procedural hurdles create possibilities for gamesmanship in how property rights are allocated. Furthermore, even if granted correctly, property rights can become murky because of the problems of enforcement through litigation. Courts must determine when an invention has been used, made, or sold without permission by a third party in violation of the rights of the patent owner. This legal process can lead to gamesmanship as patent owners try to force settlements from alleged infringers. Meanwhile, third parties may act opportunistically to take advantage of the uncertain boundaries of patent rights and engage in undetectable infringement. Exacerbating these tendencies are the difficulties in determining damages and the possibility of injunctive relief. Some caution against these criticisms through the observation that most patents are not enforced. In fact, most granted patents turn out to be worthless, when gauged in commercial value. But worthless patents still have potential litigation value. While a patent owner might view a worthless patent as a sunk cost, there is incentive to recoup investment through the sale of worthless patents to parties willing to assume the risk of litigation. Hence the phenomenon of “trolling,” or the rise of non-practicing entities, troubles the patent landscape. This phenomenon gives rise to concerns with the anticompetitive uses of patents, demonstrating the need for some limitations on patent enforcement. With all the policy concerns arising from patents, it is no surprise that patent law has been ripe for reform. Economic analysis can inform these reform efforts by identifying ways in which patents fail to create a vibrant market for inventions. Appreciation of the political economy of patents invites a rich academic and policy debate over the direction of patent law.

Article

“Antitrust” or “competition law,” a set of policies now existing in most market economies, largely consists of two or three specific rules applied in more or less the same way in most nations. It prohibits (1) multilateral agreements, (2) unilateral conduct, and (3) mergers or acquisitions, whenever any of them are judged to interfere unduly with the functioning of healthy markets. Most jurisdictions now apply or purport to apply these rules in the service of some notion of economic “efficiency,” more or less as defined in contemporary microeconomic theory. The law has ancient roots, however, and over time it has varied a great deal in its details. Moreover, even as to its modern form, the policy and its goals remain controversial. In some sense most modern controversy arises from or is in reaction to the major intellectual reconceptualization of the law and its purposes that began in the 1960s. Specifically, academic critics in the United States urged revision of the law’s goals, such that it should serve only a narrowly defined microeconomic goal of allocational efficiency, whereas it had traditionally also sought to prevent accumulation of political power and to protect small firms, entrepreneurs, and individual liberty. While those critics enjoyed significant success in the United States, and to a somewhat lesser degree in Europe and elsewhere, the results remain contested. Specific disputes continue over the law’s general purpose, whether it poses net benefits, how a series of specific doctrines should be fashioned, how it should be enforced, and whether it really is appropriate for developing and small-market economies.

Article

Jacques-François Thisse

Despite the drop in transport and commuting costs since the mid-19th century, sizable and lasting differences across locations at very different spatial scales remain the most striking feature of the space-economy. The main challenges of the economics of agglomeration are therefore (a) to explain why people and economic activities are agglomerated in a few places and (b) to understand why some places fare better than others. To meet these challenges, the usual route is to appeal to the fundamental trade-off between (internal and external) increasing returns and various mobility costs. This trade-off has a major implication for the organization of the space-economy: High transport and commuting costs foster the dispersion of economic activities, while strong increasing returns act as a strong agglomeration force. The first issue is to explain the existence of large and persistent regional disparities within nations or continents. At that spatial scale, the mobility of commodities and production factors is critical. By combining new trade theories with the mobility of firms and workers, economic geography shows that a core periphery structure can emerge as a stable market outcome. Second, at the urban scale, cities stem from the interplay between agglomeration and dispersion forces: The former explain why firms and consumers want to be close to each other whereas the latter put an upper limit on city sizes. Housing and commuting costs, which increase with population size, are the most natural candidates for the dispersion force. What generates agglomeration forces is less obvious. The literature on urban economics has highlighted the fact that urban size is the source of various benefits, which increase firm productivity and consumer welfare. Within cities, agglomeration also occurs in the form of shopping districts where firms selling differentiated products congregate. Strategic location considerations and product differentiation play a central role in the emergence of commercial districts because firms compete with a small number of close retailers.

Article

Peter Sivey and Yijuan Chen

Quality competition between alternative providers is an increasingly important topic in the health economics literature. This literature includes theoretical and empirical studies that have been developed in parallel to 21st-century policies to increase competition between doctors or hospitals. Theoretical studies have clarified how competitive markets can give healthcare providers the incentive to improve quality. Broadly speaking, if providers have an incentive to attract more patients and patients value quality, providers will raise quality until the costs of raising quality are equal to the additional revenue from patients attracted by the rise in quality. The theoretical literature has also investigated how institutional and policy parameters determine quality levels in equilibrium. Important parameters in models of quality competition include the degree of horizontal differentiation, the level of information about provider quality, the costs of switching between providers, and the time-horizon of quality investment decisions. Empirical studies have focused on the prerequisites of quality competition (e.g., do patients choose higher quality providers?) and the impact of pro-competition policies on quality levels. The most influential studies have used modern econometric approaches, including difference-in differences and instrumental variables, to identify plausibly causal effects. The evidence suggests that in most contexts, quality is a determinant of patient choice of provider, especially after greater patient choice is made available or information is published about provider quality. The evidence that increases in competition improve quality in healthcare is less clear cut. Perhaps reflecting the economic theory of quality competition, showing that different parameter combinations or assumptions can produce different outcomes, empirical results are also mixed. While a series of high-quality studies in the United Kingdom appear to show strong improvements in quality in more competitive areas following pro-competition reforms introducing more choice and competition, other studies showed that these quality improvements do not extend to all types of healthcare or alternative measures of quality. The most promising areas for future research include investigating the “black box” of quality improvement under competition, and behavioral studies investigating financial and nonfinancial motivations for quality improvements in competitive markets.

Article

Rosella Levaggi

The concept of soft budget constraint, describes a situation where a decision-maker finds it impossible to keep an agent to a fixed budget. In healthcare it may refer to a (nonprofit) hospital that overspends, or to a lower government level that does not balance its accounts. The existence of a soft budget constraint may represent an optimal policy from the regulator point of view only in specific settings. In general, its presence may allow for strategic behavior that changes considerably its nature and its desirability. In this article, soft budget constraint will be analyzed along two lines: from a market perspective and from a fiscal federalism perspective. The creation of an internal market for healthcare has made hospitals with different objectives and constraints compete together. The literature does not agree on the effects of competition on healthcare or on which type of organizations should compete. Public hospitals are often seen as less efficient providers, but they are also intrinsically motivated and/or altruistic. Competition for quality in a market where costs are sunk and competitors have asymmetric objectives may produce regulatory failures; for this reason, it might be optimal to implement soft budget constraint rules to public hospitals even at the risk of perverse effects. Several authors have attempted to estimate the presence of soft budget constraint, showing that they derive from different strategic behaviors and lead to quite different outcomes. The reforms that have reshaped public healthcare systems across Europe have often been accompanied by a process of devolution; in some countries it has often been accompanied by widespread soft budget constraint policies. Medicaid expenditure in the United States is becoming a serious concern for the Federal Government and the evidence from other states is not reassuring. Several explanations have been proposed: (a) local governments may use spillovers to induce neighbors to pay for their local public goods; (b) size matters: if the local authority is sufficiently big, the center will bail it out; equalization grants and fiscal competition may be responsible for the rise of soft budget constraint policies. Soft budget policies may also derive from strategic agreements among lower tiers, or as a consequence of fiscal imbalances. In this context the optimal use of soft budget constraint as a policy instrument may not be desirable.

Article

Iñigo Hernandez-Arenaz and Nagore Iriberri

Gender differences, both in entering negotiations and when negotiating, have been proved to exist: Men are usually more likely to enter into negotiation than women and when negotiating they obtain better deals than women. These gender differences help to explain the gender gap in wages, as starting salaries and wage increases or promotions throughout an individual’s career are often the result of bilateral negotiations. This article presents an overview of the literature on gender differences in negotiation. The article is organized in four main parts. The first section reviews the findings with respect to gender differences in the likelihood of engaging in a negotiation, that is, in deciding to start a negotiation. The second section discusses research on gender differences during negotiations, that is, while bargaining. The third section looks at the relevant psychological literature and discusses meta-analyses, looking for factors that trigger or moderate gender differences in negotiation, such as structural ambiguity and cultural traits. The fourth section presents a brief overview of research on gender differences in non- cognitive traits, such as risk and social preferences, confidence, and taste for competition, and their impact in explaining gender differences in bargaining. Finally, the fifth section discusses some policy implications. An understanding of when gender differences are likely to arise on entering into negotiations and when negotiating will enable policies to be created that can mitigate current gender differences in negotiations. This is an active, promising research line.

Article

Ching-mu Chen and Shin-Kun Peng

For research attempting to investigate why economic activities are distributed unevenly across geographic space, new economic geography (NEG) provides a general equilibrium-based and microfounded approach to modeling a spatial economy characterized by a large variety of economic agglomerations. NEG emphasizes how agglomeration (centripetal) and dispersion (centrifugal) forces interact to generate observed spatial configurations and uneven distributions of economic activity. However, numerous economic geographers prefer to refer to the term new economic geographies as vigorous and diversified academic outputs that are inspired by the institutional-cultural turn of economic geography. Accordingly, the term geographical economics has been suggested as an alternative to NEG. Approaches for modeling a spatial economy through the use of a general equilibrium framework have not only rendered existing concepts amenable to empirical scrutiny and policy analysis but also drawn economic geography and location theories from the periphery to the center of mainstream economic theory. Reduced-form empirical studies have attempted to test certain implications of NEG. However, due to NEG’s simplified geographic settings, the developed NEG models cannot be easily applied to observed data. The recent development of quantitative spatial models based on the mechanisms formalized by previous NEG theories has been a breakthrough in building an empirically relevant framework for implementing counterfactual policy exercises. If quantitative spatial models can connect with observed data in an empirically meaningful manner, they can enable the decomposition of key theoretical mechanisms and afford specificity in the evaluation of the general equilibrium effects of policy interventions in particular settings. Several decades since its proposal, NEG has been criticized for its parsimonious assumptions about the economy across space and time. Therefore, existing challenges still require theoretical and quantitative models on new microfoundations pertaining to the interactions between economic agents across geographical space and the relationship between geography and economic development.