Competition in taxes and intellectual property right

We examine competition for foreign direct investment when governments compete in tax incentives along with intellectual property rights (IPRs) protection. Higher IPRs result in a lower probability of imitation and thus higher expected profits and tax revenues, all else equal. We derive the Nash equilibrium strategies of two competing jurisdictions and show that since individual hosts do not internalize the benefit of lower prices for other jurisdiction's consumers, the non-cooperative equilibrium exhibits an IPR externality in addition to the well-known fiscal externality from tax competition. Thus, compared to joint policy setting, equilibrium IPRs are too high.