Patent protection and R&D subsidy under asymmetric information

We examine a technology licensing under asymmetric information and discuss the effects of R&D policies. In particular, we investigate an innovator's investment strategy and the efficiency of policies from a dynamics perspective. We show that perfect patent protection is optimal under symmetric information, whereas this is not so if the licensor has private information. Furthermore, we show that social welfare under asymmetric information is higher than that under symmetric information for most patent protection levels, yet the latter dominates the former in the presence of an optimal policy for each regime. An R&D subsidy is found suboptimal under symmetric information, whereas it can be optimal given information asymmetry. This allows us to derive a combination of patent protection and R&D subsidy that yields the first-best results under asymmetric information in multiple industries simultaneously.