Licensing vs. the effect of the litigation: Legal system on incentives to innovate

With uncertain scope of patent protection and imperfect enforcement, the ef fective strength of patent protection is determined by the legal system. We analyze how the legal system affects the incentives of firms to innovate, taking into account possibilities of strategic licensing and litigation to deter imitation. The legal system that guarantees the patentee's monopoly p ower maximizes the R & D intensities. However, the legal system that induce s licensing provides incentives to exert R & D effort while preserving ex p ost efficiency. We also compare R & D, patent licensing, and litigation beh avior under American and English rules of legal cost allocation.