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Abstract:
This paper merges patent citation data with data on pharmaceutical patent expirations, generic entry, and pricing to explore the effects of observable patent characteristics on off-patent and on-patent pharmaceutical pricing. Using a sample of drug patents facing generic entry in the 1990s, I find that the price of branded drugs increased on average in the face of generic entry. Importantly, I find that the number of patent citations that a drug receives from other firms is correlated with a decrease in markup and a decrease in the duration of the markup. Conversely, self-citations are correlated with higher prices and slower decay in prices. The results indicate that patent citations may signal the degree of inter-molecule substitution. And, importantly, self-citations may indicate a degree of cumulative patenting that enables a firm to effectively extend or strengthen the original patent protection. This research takes a step forward in understanding the distinction between "positive" citations and "negative" citations related to creative destruction.

pharmaceuticals, pricing, patents, generic entry, patent citations

Abstract:
We compare the process to obtain air pollution emission permits for automobile assembly plants in the U.S. and Germany. The project consists of four case studies in which comparisons are made with respect to the costs of obtaining air pollution permits for assembly plant "paint shops"--the part of the factory where new cars and trucks are painted. The plants are owned by the same company, use nearly identical paint application technologies and paints, and use virtually the same air pollution control technologies. Moreover, both countries are federalist in structure, with the national government setting general standards, and the states issuing and enforcing individual permits. These similarities allow us to compare the permitting processes in U.S. and Germany, and to isolate the salient political and legal differences and economic consequences.

In both the United States and Germany, state air pollution agencies implement federal standards that effectively require the assembly plants to install similar pollution abatement technologies to control emissions resulting from increases in production or changes in paint composition. Nevertheless, the two countries' regulatory processes are rather different. Air pollution control laws, regulations, and plant-level permits in the U.S. are somewhat more stringent, detailed, and prescriptive than in Germany. Moreover, U.S. law provides substantially greater opportunity for public participation in agency permitting decisions, and at one U.S. plant, public participation significantly affected the regulatory outcome. For these and other reasons, the permitting processes at the U.S. plants were much slower and more conflictual than at the German plants, resulting in much longer delays in making production changes and installing new pollution controls.

Abstract:
Using a sample of patents litigated between 1977 and 1997, I estimate stock market reactions to patent litigation decisions and to patent grants. I find that the resolution of uncertainty over validity and infringement is worth as much to the firm as the initial patent right. Each is worth about 1 to 1.5% excess returns. Additionally, I find that there are significant differences pre and post-1982 with the establishment of the Court of Appeals for the Federal Circuit. I also find that there are significant differences in reactions for plaintiff patent-holders and defendant patent-holders. Interestingly, there is no similar effect for appellate court decisions relative to the district court. To my knowledge, this is the first study that measures the stock market reactions to legal outcomes of patent cases. The results have important policy implications.

event studies, patents, patent litigation

Abstract:
Most studies on no-fault automobile insurance examine either fatalities per vehicle mile or fatalities per capita. However, it is well established in the analysis of tort law that tort liability can have incentive effects on both precaution level and activity level. In this paper we separate precaution effects from activity level effects to determine both the total effect of no-fault automobile insurance on fatalities per capita and miles per capita and the component effects of no-fault on fatalities per mile, miles per vehicle, and vehicles per capita. We find that no-fault laws have a significant effect on fatalities per mile and fatalities per capita, but (mostly) insignificant effects on miles per vehicle, vehicles per capita, and miles per capita. We conclude that the deterrence effect of tort law is stronger on precaution than it is on activity level.

No-fault automobile insurance, tort, deterrence

Abstract:
In 1982, the US Congress established the Court of Appeals for the Federal Circuit (CAFC) as the sole appellate court for patent cases. Ostensibly, this court was created to eliminate inconsistencies in the application and interpretation of patent law across federal courts, and thereby mitigate the incentives of patentees and alleged infringers to "forum shop" for a preferred venue. We perform the first econometric study of the extent of non-uniformity and forum shopping in the pre-CAFC era and of the CAFC's impact on these phenomena. We find that in patentee-plaintiff cases the pre-CAFC era was indeed characterized by significant non-uniformity in patent validity rates across circuits and by forum shopping on the basis of validity rates. We find weak evidence that the CAFC has increased uniformity of validity rates and strong evidence that forum shopping on the basis of validity rates ceased several years prior to the CAFC's establishment. In patentee-defendant cases, we find that validity rates are lower on average, but do not find either significant non-uniformity of validity rates across circuits or significant forum shopping.

patents, patent litigation, forum shopping, federal circuit, appeals, appellate courts

Abstract:
This paper presents structural estimates of the probability of validity, and the probability of Type I and Type II errors by courts in patent litigation. Patents are modeled as uncertain property rights, and implications of the model are tested using stock market reactions to patent litigation decisions. While court errors are inherently unobservable, the estimation quantifies beliefs about patent validity and court errors in a Bayesian context by relying on observable win rates and stock market reactions. I estimate that the underlying beliefs about validity average from 0.55 to 0.70 for litigated patents. For a number of different specifications, I show that Type I errors (finding a valid patent invalid) occur with an estimated probability of 0.20 to 0.25. The range for Type II errors (finding an invalid patent valid) varies more broadly, from near zero probability to as high as 0.40. Additional implications of the model address patent value.

patents, uncertainty, litigation, innovation, event study

Abstract:
The use of patent citations as a measure of patent "quality" increased dramatically in recent years. In this note, I use hazard estimation to explore the dynamics of patent citation. I find evidence of unobserved heterogeneity and a means to separate patent quality from citation "inflation."

patents, patent citations, hazard rate, duration, patent quality

Abstract:
This paper presents a mechanism for regulating pollution when industry harm - but not individual firm's contributions - is observable. The mechanism is based on a modification of Cooter and Porat's Total Liability for Excessive Harm (TLEH). We propose an alternative mechanism of Shared Social Costs (SSC), where firms share the total cost of industry harm and abatement costs. In cases where the abatement costs for each firm are verifiable, SSC may provide an efficient alternative to TLEH.

The mechanisms are largely equivalent, but require different types of information for the regulator. For a legal target to be set in TLEH, it requires either knowing the cost functions of individual firms or accommodating error costs by gradually reducing the legal target until the efficient level is found. On the other hand, SSC requires observing individual firms actual abatement expenditures as opposed to knowing their cost functions. Both rules provide efficient incentives for abatement, and require being able to observe and monetize industry level harm.

We show that SSC leads to efficient incentives for entry and exit, has appealing incentives for innovation, and can be applied advantageously to remediation. In markets with heterogeneous firms, we propose weighting cost-sharing by firms' market shares.

tort law, liability, environmental regulation, total liability, asymmetric information

Abstract:
In June 2005, the Supreme Court made one of its least popular decisions in recent history: Kelo v. The City of New London. The decision has come under much criticism, and spurred much state legislation in response. However, we believe that the discussion surrounding the case has focused on the wrong issues. In particular, the Court - and the subsequent legislation - ignores a simple point: local decision makers make local decisions.

We use a simple story from Hazlitt to examine the concept of opportunity cost in the context of takings. The story of the Broken Window at once exposes the fallacy in measuring about the public benefit of takings, and provides a framework in which to discuss it using simple numerical examples.

property rights, eminent domain, tax competition, Kelo

Abstract:
We investigate the merger behavior of firms in the plant biotechnology sector using firm-level patent data for public and private firms in the 1980's and 1990's. Conditional logit estimation is used to estimate the probability that firms will "match" in mergers and spinoffs. We calculate several patent portfolio-based measures of complementarity and spillovers between firms, and find that both are important to defining a good match of acquirer and target. However, complementarities provide the more robust explanation. The mergers and spinoffs observed in plant biotechnology may have been designed to overcome the anti-commons problem of mutually blocking technology, an extreme form of complementarity. Our results highlight the need to integrate patent and competition policy.

mergers, acquisitions, patents, plant biotechnology, agricultural biotechnology, complementarities, spillovers

Abstract:
In the wake of the US Supreme Court decision in Kelo v. The City of New London, several state passed regulation increasing the statutory compensation for eminent domain takings. Some of the increases were based on multipliers of market value, yet there has been little attempt to provide an economic justification for the magnitude of the multipliers. In this note, I propose a mechanism to compensate property owners at the average willingness-to-pay rather than the marginal willingness-to-pay.

eminent domain, takings, just compensation, multiplier

Abstract:
We develop a model of bargaining and litigation in the context of patent licensing (or any contractual setting). Following Priest and Klein (1984)we developed a model that explicitly allows for (1) multiple parties (leading to asymmetry of stakes), (2) binding precedent, and (3) pre-dispute bargaining done in the 'shadow' of precedent-setting courts. The pre-dispute bargaining creates an endogenous opportunity cost of litigation for both plaintiff and defendant; i.e., the harm is endogenous. We show that the effects of asymmetric stakes on the litigation rate and plaintiff win rate are offset by opportunity costs forgone licensing). That is, including the downside of litigation we see that the degree of asymmetry does not appear to substantially impact the rate of litigation or the observed win rate of plaintiffs at trial. This result is in stark contrast to the previous theoretical literature, and has implications for interpreting the empirical literature. We discuss the implications of the model for the value of patent rights.

bargaining, litigation, licensing, patents, selection, selection hypothesis, Priest and Klein, asymmetric stakes

Abstract:
In this note we investigate the infringement (entry) decision for a firm facing an incumbent patent holder with uncertain patent rights. The entrant risks a dispute by entering, resulting in either a settlement (licensing) or litigation and trial. Using the litigation model described by Priest and Klein, we investigate the expected dispute resolution and its impacts on the entrant's pre-dispute behavior. The primary contribution is to show that the entrant's expectations about the patent holder's beliefs about patent enforceability are a driving factor behind the entry decision. We develop a simple taxonomy of entrant and incumbent types to explain the entry decision.

patents, uncertainty, entry, patent litigation, patent infringement, entry deterrence

Abstract:
In recent years a great deal of attention has been paid to patent reform. This debate is exemplified by recent popular publications (Jaffe and Lerner, 2004; Bessen and Meurer, 2008), as well as publicized patent litigation such as the NTP v. Research-in-Motion patent litigation (the Blackberry patents). At the same time, scholars point to the over-burdened patent offices, the growth in patent applications, and the proliferation of low-quality or overlapping patents. In this paper, we take a novel approach to dealing with the flood of applications at the patenting authorities in the US and Europe and the resulting delay and issuance of low quality patents. We explore the magnitude of the congestion externality and seek to determine the optimal balance of the direct costs of applying for a patent with the indirect cost caused by regulatory delay. Our proposed theoretical and empirical framework enable explicit measurement of the cost of delay and the implications of changing patent application fees. The results have implications for a variety of policy questions involving optimal fees, patent quality, and competition policy. We include in this submission a basic theoretical model that can be extended to examine a number of policy implications, including the relationship between examination time and patent quality. We also describe an empirical approach that enables quantification of the cost of delay. Both the model and the empirical work enable us to discuss additional policy questions such as the importance of application versus renewal fees, the consequence of the self-funding constraint on patent offices, and the impact of higher quality patents on rent-seeking activities. Preliminary results show that the patent office revenue maximizing fee exceeds the optimal fee for patent holders, but that the optimal fee for patent holders is positive.

This research benefited from a Tilburg Law and Economics Center (TILEC) IIPC grant.

patents, patent applications, patent application fee, renewal fee

Abstract:
Few empirical studies have addressed the impact of the patent system on industry structure. Using firm-level patent data for firms in plant biotechnology, we develop a measure of patent enforceability. Duration models show that patent statistics are useful predictors of the timing of consolidation and that patent enforceability is an important factor influencing the likelihood of consolidation. Acquisitions in plant biotechnology may be motivated by the enforcement of patent rights when firms have overlapping technologies' some merger activity may be explained by attempts to avoid mutually blocking technology, as exemplified by the case of Roundup Ready corn.

Abstract:
The authors look at the impact of state lotteries on state tax revenues; they find that as lottery revenue increases, sales tax revenue decreases. However, declines in sales tax revenue appear to be offset by increases in personal and corporate income tax revenues.

States with high lottery revenues are less likely to raise sales taxes, the authors find.