The impact of parallel imports on investments in cost-reducing research and development |
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Authors: | Changying Li |
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Institution: | a Institute of Economics, Nankai University, Tianjin 300071, P. R. China b Department of Economics, UCB 256, University of Colorado, Boulder, CO 80309-0256, USA |
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Abstract: | We develop a two-country model of endogenous investment in process innovation by a manufacturer facing competition from parallel imports (PI). We find that the distortions associated with PI inhibit innovation. However, the difference between the manufacturer's expected profits under successful and failed innovation is U-shaped in the cost of engaging in PI. Thus, the reduction in R&D investment depends on both legality of PI and transport costs. The reduction in innovation could harm global welfare, depending on whether the manufacturer was deterring PI with a high wholesale price. If so, banning such trade would raise expected welfare. |
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Keywords: | F12 L11 |
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