“Compulsory Licensing – Evidence from the Trading with the Enemy Act,” P. Moser & A. Voena (2011)

Petra Moser is unquestionably doing the most interesting data-driven work on invention and growth of any economist working today; indeed, if only she applied her great data more directly to puzzles in theory, I think she would become a good bet for a Clark medal in a few years. The present paper, with Alessandra Voena, a star on last year’s junior job market, is forthcoming in the AER, and deservedly.

The problem at hand is compulsory licensing. This is a big deal in the Doha Round of WTO negotiations, since many poor and middle-income countries (think Thailand and Brazil) force drugmakers to license some particularly important drugs to local manufacturers. This helps lower the cost of AIDS retrovirals, but probably also has some negative effect on the incentive to develop newer drugs for diseases prevalent in the third world. But the tradeoff is not this simple! Because the drugs are licensed to local firms, who then produce them, there is some technology transfer and presumably some learning-by-doing. Does compulsory licensing help infant industries grow in the recipient country? And by how much?

The historical experiment is the Trading with the Enemy Act. During WWI, the US government seized a bunch of property owned by German firms, including their patents. They then licensed these at low cost to US firms. Germany was well ahead of the US technologically in organic chemistry, and Moser and Voena use this fact to study the impact of compulsory licenses for a variety of chemical dyes. They find that in (very narrowly defined) technological areas where patents where licensed, future propensity to patent by US firms roughly doubled. No such increase was seen in non-American firms who didn’t have access to such cheap licenses. The impact on future patents occurred a few years after WWI, consistent with a learning by doing story. Relevant for the Doha Round debate, German firms quickly began working on new chemistry inventions after the war, which you might interpret as consistent with a one-time seizure of IP having no long-term impact on invention if it truly an exceptional circumstance.

Why the delay if you have a patent explaining what to do? It turns out that patents – and this is true even today – are often woefully insufficient to replicate an original invention. DuPont’s first attempt at (German-invented) indigo dye turned out green instead of blue! BASF’s Haber-Bosch process patent didn’t include certain tricky details regarding chemical nature of the appropriate catalyst; it took 10 years for US firms to figure out the secret.

http://ssrn.com/abstract=1313867 (July 2011 working paper. Moser and Voena also, according to Moser’s website, have a forthcoming working paper on the impact of TRIPS licensing on the US pharma industry which I certainly want to check out. As far as I know, that paper hasn’t begun to circulate.)

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3 thoughts on ““Compulsory Licensing – Evidence from the Trading with the Enemy Act,” P. Moser & A. Voena (2011)

  1. LuigiP says:

    “…if only she applied her great data more directly to puzzles in theory…”

    you got me curious on this one, could you expand a little?

    • afinetheorem says:

      Nothing complicated. All I mean is that there are lots of theoretical models of, say, licensing, and the style of paper here doesn’t speak to them at all. The same goes for learning-by-doing models. Or using theory to guide identification restrictions rather than just using DiD.

      • LuigiP says:

        I see. I’ve read that sentence as referring to all/most of her work, not just the current paper. Hence my question.

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