Subsidies or Tax Breaks Versus Intellectual Property Rights: Dual Markets

Intellectual property rights are monopoly rights, which have undesirable welfare properties. Therefore, several studies suggest to use rewards as incentives for innovation instead. However, these studies have thus far had little effect on actual policy, possibly because such rewards may be difficult to implement in practice. We suggest a way of providing incentives to originators that is easy to implement. This is possible if there is an additional market in which the originator operates, where copying is not easily possible. Taking the music industry as example, copyrights in the records market could be replaced by subsidies or tax breaks in the market for live performances. We provide a modeling framework that can be used to analyze in which cases the replacement of intellectual property rights in one market with subsidies in another market is welfare improving or even pareto efficient.