reason is that imitating countries would lose some profits: a marginal increase in θ
induces a profit loss of β (1 — β} Ysdθ, thereby reducing a country consumption level.
Therefore, it can be optimal from the point of view of the South not to have full
protection of IPRs. This is more likely the higher the profit share in the economy.
Even if strong protection of IPRs is in the interest of the South, in the sense that
the productivity gain due to higher or more appropriate innovation outweights the
profit loss, the government might fail to implement the optimal policy for political
reasons: if the group of monopolists that enjoy the rents from imitation has more
political power that the workers, it may prefer to defend its share of profits at the
expenses of the rest of the economy. Further, if the Southern policy makers behave
myopically and fail to consider the effect of their policies on world innovation, then
they would set an inefficiently low level of IPRs protection. Finally, in implementing
IPRs protection, there might be a coordination problem among Southern govern-
ments of similar countries: each of them prefers the others to enforce IPRs, in order
to attract innovation, but has an incentive to free ride not enforcing these property
rights itself. However, this depends on the pattern of specialization and on the size
of each country. If each Southern country specialized in a different set of commodi-
ties, then the coordination problem would disappear, as stronger IPRs would be
beneficial for the enforcing country only. Similarly, a large country would have a
higher incentive to protect IPRs because of its larger impact on world innovation
and its limited ability to benefit from others’ policies. To better understand these
implications, the analysis is now extended to a multi-country setting.
2.4 Extensions
This section provides a sketch of how to extend the results to a multi-country world
and how to incorporate non-traded goods. These extensions add more realistic fea-
tures to the basic model and help to clarify some of its empirical predictions. Con-
sider first a case where the world economy can be divided into three homogenous
regions: high (H), middle (M) and low (T) income countries. A key assumption
here is that countries belonging to different regions have different exogenous pro-
ductivities. The autarky solution is straightforward. To keep the analysis under free
trade as simple as possible, assume that фн (г) /Φm (г) and фм (г) /Φl (г) are con-
tinuous and strictly decreasing in г. Further, assume that Φ∣∣ (г) > фм (г) > Φl (г),
∀i ∈ [0,1], implying that -w∣∣ > Wm > w^ and that region H specializes in the
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