Spillovers, licensing and welfare

In this paper, we talk about the optimal public policy towards technology transfer between competitors of different productivity. Two technology diffusion methods will be introduced, knowledge spillovers and licensing. In the previous studies, the discussions on these two methods are usually conducted in isolation and the links between them are rarely of concern to researchers. However, in reality knowledge spillovers and licensing coexist with each other and there are important interactions between them. Aware of this in mind, we contribute to the literature by including both knowledge spillovers and the possibility of licensing in an asymmetric duopoly model, analyzing the interactions between them and incorporating this aspect into the policy making process. The new derived policy in this paper is a significant improvement of the traditional one developed in the past literature. Roughly speaking, switching from the traditional policy to the new one can raise the expected social welfare by 2.1 percents.