Some light reading over summer

From the latest issue of the Journal of Economic Behavior and Organization:

In this paper, we examine an alternative perspective: an exchange view of intellectual property and intellectual property rights. We relax the standard assumption of a benevolent government simply maximizing social welfare. We build on insights into the emergence of the state first articulated by North (1981, 1990, 2005), Barzel (2002), Olson (1993, 2000), and Sened (1997). North argues that the state exchanges services and protection for revenue—as do we. All of these authors to some extent or another explain how the state comes into existence, and how institutions evolve to constrain behavior. The state constrains private (mis)behavior through the deployment of violence, development of ideology, or paying off elites but, over time, itself becomes constrained in its own use of violence through the establishment of institutions such as the rule of law, constitutions, and democratic elections. As North (2005) recognizes, the state evolves from being extortionary to exchanging legal rights for revenue. Of course, it is not just states that provide order in exchange for revenue—Barzel (2002), for example, discusses ‘criminal states’ where organized crime provides order in exchange for revenue. Leeson (2014) provides multiple examples of private self-governance. We build upon all these insights to examine issues relating to intellectual property and intellectual property rights. Our contribution lies in the recognition of the existence of other states in the world. In the literature, other states are seen as being potential rivals to the existing state—competition to provide public goods and collect tax exists between states. The literature, however, is somewhat silent on the prospects of international trade—implicitly the literature assumes a world of autarky. When trade is discussed, in Barzel (2002) for example, it relates to the setting of standards, the building of roads, and the like. This ignores the scope for international trade, or international location decisions. It may well be that case that a firm operates under the protection of a state that is constrained by the rule of law, democratic elections, and other institutions that promote prosperity and economic growth exactly as North describes. Yet what is to stop a foreign state from expropriating its property? Our argument is that the state must offer both domestic protection and international protection to its subjects.

It is here that terminology proposed by Olson (1993, 2000) becomes useful. He provocatively describes governments (or the state) as being ‘stationary bandits’. A ‘stationary bandit’ is a former ‘roving bandit’ that has settled down to establish a monopoly on theft in return for protecting their tributes, now called ‘tax-paying citizens’. Both Sened (1997) and Barzel (2002) explain how institutions, such as the rule of law, emerge to constrain the monopoly on theft (and violence) in this situation. A stationary bandit can be thought of as a state that has evolved from being extortionary to exchanging legal rights for revenue, whereas a roving bandit can be thought of as one that still engages in extortion or uncompensated expropriation.

In this paper, we use the terminology of the stationary and roving bandit to establish the impact that this exchange of revenue for rights has on the location of innovative activity when there are multiple states involved. Specifically, once an innovative firm has chosen its location, it is affected not only by the taxation regime imposed by its domestic government, but also the tax regimes imposed by foreign governments. The relationship that the firm has with its own government, however, is different than that it has with other governments. With its own government, there is an explicit exchange of rights for revenue; in other words, to use Olson’s terminology, the domestic government is a stationary bandit. Other governments, with whom no such exchange relationship exists, are in essence roving bandits capable of appropriating the returns of the firm’s innovative activities through their tax policies that alter the incentives of their own firms. While the term ‘bandit’ can often carry negative connotations in terms of entities that appropriate wealth using violence or that engage in behavior outside the law, our own usage of the term is not intended to imply any such connotation (though it can do so if the context requires it). Rather, it simply recognizes that Olson’s terminology is useful in characterizing the different types of relationships that a firm can have with different governments.

The possible application of a ‘stationary bandit model’ to intellectual property is presented in Davidson and Potts (2017), who argue that new ideas—of the sort that become patents, copyrights, and trademarks—emerge as economic rights; born global into a world of roving bandits. Barzel (2002) defines economic rights as being the ability to consume the services of an asset or to exchange it. Economic rights are distinct from legal rights. But intellectual property has public good characteristics (Arrow, 1962) in that it is (often) non-rival and (largely) non-excludable (but see Kealey, 1996). In order to profit from intellectual property entrepreneurs or firms need to hold legal rights to that intellectual property. The state needs to establish and enforce intellectual property rights – this differentiates a stationary bandit from a roving bandit. Barzel (2002) defines legal rights are existing where the state delineates property as belonging to particular individuals or institutions.


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3 Responses to Some light reading over summer

  1. nb

    ‘Leeson (2014) provides multiple examples of private self-governance.’
    My latest topic of interest.
    As a matter of interest, here is a video of Leeson:
    Peter Leeson Book Panel: Anarchy Unbound: Why Self-Governance Works Better Than You Think, Sep 26, 2014, Mercatus Center

  2. Crossie

    Our argument is that the state must offer both domestic protection and international protection to its subjects.

    Any government that fails to control its borders is failing in its international protection of its subjects. Open borders are a no-no to anyone who has to compete for jobs, resources or housing in the form of increased prices. The only people who are in favour of open borders are the Davosie who want cheap labour but don’t want to go overseas for it.

  3. Crossie

    The state needs to establish and enforce intellectual property rights – this differentiates a stationary bandit from a roving bandit.

    What the writer is too squeamish to say is look at the Chinese, the biggest roving intellectual property bandit on the planet.

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