Location, taxation and governments: An exchange theory of intellectual property

The standard economic model of intellectual property is an efficient property rights solution to a market failure problem of investment in a non-rival and non-excludable good. We propose an exchange theory of intellectual property based on a contracting approach in the context of market-making and enforcement of economic rights in exchange for monopoly taxation rights. We use a Hotelling (1929) type spatial model to show the relationship between location and pricing decisions of innovating firms under differing intellectual property, institutional quality, and taxation regimes.