Non-homothetic preferences and IPRs protection

There are two opposite views regarding whether stronger protection of intellectual property rights (IPRs) will benefit or hurt the South. We provide a unification using a model of directed innovations with identical but non-homothetic preferences. For the South, a major benefit of protecting IPRs is incentivizing innovations that better address its needs (the directed-innovation benefit), and a major cost is yielding monopoly rents to innovators (the monopoly-rent cost). When preferences are non-homothetic, the directed-innovation benefit decreases in South's income, because consumption baskets of the South become more similar to those of the North; while the monopoly-rent cost increases in the South's income, because higher income admits greater monopoly markups. The combined effect implies that the costs of IPRs protection tend to outweigh the benefits for mid-income countries, while the opposite is true for low-income ones. We discuss the policy implications of this observation.