Imperfect patent protection and licensing

We extend the literature on licensing, introducing imperfect patent protection. We present a model where an efficient entrant may license its technology to an incumbent; however, because of imperfect patent protection, the incumbent may imitate the technology of the entrant with a non-negligible probability to not be convicted. We prove that the introduction of imperfect patent protection reduces the values of both exclusive and sole licenses, making in some cases the latter more profitable for the licensor. As a consequence, on a one hand, the threat of imitation enlarges the number of firms that operate in the market with the efficient technology, increasing allocative and (static) productive efficiency; on the other hand, the same threat reduces expected R&D returns, negatively affecting the ex-ante incentive to innovate and the dynamic efficiency of the market .