Short Executive Summary

This project examines the enforcement of intellectual property protection for seed and plant innovations through production contracts. We propose Pareto-optimal dynamic pricing mechanisms consisting of the seed company's observable variables and credible threats against farmer-saved seed provided by either the seed company or the federal court system. Such pricing mechanisms would make deviations from the contract - that is, farmer-saved seed - economically unattractive to the farmer, and therefore, promote his participation in the contract. This is a contractual strategy for the seed company, which is an alternative to paying farmer price premiums for the harvested, high-quality seed.

In a second arena, we have examined data pertaining to ag-biotech patent networks and employed an estimation of empirical models based on that dataset. Focusing on the ag-biotech industry, this work employs patents and patent citation data for ag-biotech patents to measure characteristics of innovation niches.

Our estimation results indicate an observable technical change (substitutes or/and improvements to the existing technology) is likely to occur within 2 years after the introduction of that particular technology. They further suggest a rather undifferentiated web structure in the ag-biotech innovation networks connecting various technological niches. Nonetheless, within this web-like structure, one can identify key players (innovating firms) that significantly promote future niche entries and further the development of technologies within those niches. The results also show that most of the litigated patents (focal patents) function as a bedrock for future inventions, whereas some of them are pioneering technologies. Focal patents appear to have mixed effect (both encouraging and discouraging effects) on entry into innovation niche markets.

In a third arena, we show that both domestic and foreign seed producers respond in a similar fashion to market incentives generated by strong and weak intellectual property regimes. The implications of not creating and providing significant legal regimes for protecting agricultural biotechnology innovation has significant impact in terms of the allocation of resources devoted to both indigenous research on plant innovation, regardless of country, and also on the choices being made by growers acting in response to current weak property regimes.

Finally, I have an edited book that is forthcoming from CABI Publishing from Oxford, UK, will be publishing an edited book based on an international conference, Seeds of Change: Intellectual Property Protection for Agricultural Biotechnology. This conference was organized to foster intellectual interests in issues that intertwine intellectual property protection regimes with advancements in agricultural biotechnology. This conference is one of the first attempts to bring together legal, economic and technological communities involved in these issues.

Project Highlights that summarizes project activities and describes the achievements with respect to stated project objectives and purposes.

(1) A Dynamic Pricing Mechanism to Achieve Pareto Optimality ina Seed Production Contract

This work examines the enforcement of intellectual property protection for seed and plant innovations through production contracts.

Farmer-saved seed is a minor concern under seed production contracts, whereas it draws serious economic concern under contracts for seed sales, because it very likely reduces seed companies' profits. A reason for this difference is often attributed to price premiums offered under seed production contracts (written by seed companies) to the farmers to compensate them for lower yields of higher quality seed. Even though they are widely accepted in practice, there is little theoretical discussion on price premiums using economic theory. With the intent to mitigate this deficit, this work examines economic rationales for the price premium provision in contracts between seed companies and farmers. The seed companies' main challenge in designing seed production contracts is enforcing the property rights of their seed and plant inventions with patent law designed ex ante, while discouraging farmer-saved seed, which is ex post imperfect information only observed by their contracted farmers.

The economics of contracts suggests examining farmer-saved seed as moral hazards in a contract. Thus, a game theoretic model is constructed to treat the farmer-saved seed as a moral hazard problem between the seed company (the principal) and the farmer (the agent).

The model's findings propose Pareto-optimal dynamic pricing mechanisms consisting of the seed company's observable variables and credible threats against farmer-saved seed provided by either the seed company or the federal court system. Such pricing mechanisms would make deviations from the contract - that is, farmer-saved seed - economically unattractive to the farmer, and therefore, promote his participation in the contract. Hence, the model proposes a contractual strategy for the seed company, which is an alternative to paying farmer price premiums for the harvested high quality seed.

(2) Network Analysis of Ag-Biotech Patents

Networks of citations among papers on a research topic reflect the structure of scholarship on that topic (Hargens). They relate to network structures in the economy, which often generate positive externalities referred to as network externalities (Economides 1996a). Knowledge transfer characterizes knowledge diffusion through research, in which citations are the paper trails tracking social, organizational and geographic pathways of knowledge flows (Alcacer and Gittelman). Prior art citations, submitted with patent applications to the USPTO, are also evidence of knowledge diffusion (Sorenson, Rivkin and Fleming). Citations identify technologies used or improved upon by firms in their innovations (Ziedonis). Citation analysis examines citation (referencing) patterns among papers and/or patents to detect seminal contributions, interaction patterns among fields or institutions, and even to forecast emerging research areas. Patent analysis, by such practitioners as Mogee Research and Analysis and CHI Research, tallies patent activity by patent classifications to ascertain business interests such as company profiles and market trends (Porter and Detampel).

This work adopts a framework that views citations as a trace of knowledge flows in the economy. Its main purpose is to consider characteristics of innovations that become a function for future technological developments rather than a dead end. This work is inspired by an earlier work by Podolny and Stuart (1995). Improving richness in the data and adjusting variables in their model, this work adopts their concept of a "technological niche" as an analytical construct to focus directly on the relational context that coevolves with technical change.

The analysis in this work revolves around the examination of patent network data and an estimation of empirical models based on that dataset. Focusing on the agricultural biotechnology (ag-biotech) industry, this work employs patents and patent citation data on ag-biotech patents to measure characteristics of innovation niches. A frequency of niche entry is approximated by measuring the duration between the first and second times the focal patent is cited, i.e., the duration between the first in-component citation and the second in-component citation. In other words, it is assumed that the duration between the first and the second in-component citations adequately represents the speed of the process of niche entries and hence extensions (Podolny and Stuart). Using this as the dependent variable, the project employs the proportional hazards model (often referred to as the Cox model), which is the most commonly used duration model.

The estimation results indicate an observable technical change (substitutes or/and improvements to the existing technology) is likely to occur within 2 years after the introduction of that particular technology. They further suggest a rather undifferentiated web structure in the ag-biotech innovation networks connecting various technological niches. Nonetheless, within this web-like structure, one can identify key players (innovating firms) that significantly promote future niche entries and further the development of technologies within those niches. The results also show that most of the litigated patents (focal patents) function as a bedrock for future inventions, whereas some of them are pioneering technologies. Focal patents appear to have mixed effect (both encouraging and discouraging effects) on niche entries. The complexity within the web-like network structure underlines the disruptive impact of invalid patents on communication between inventors as well as on development and maturity of technologies.

(3) Insecure Property Rights and Research and Development on New Plant Varieties

This work analyzes the evolution of property rights legislation in the U.S. and Argentina with respect to new seed varieties in the last few decades. We provide a narrative description of the regulatory changes and then present a theoretical model to explain how differences in legislation affect investment incentives.

From this model, we obtain a series of empirical implications: First, the price and quantity of new varieties will depend on the level of property rights in the market. Second, the quality of the new varieties will have a positive impact on prices and quantities offered, but a negative effect on quantity demanded. Third, the level of investment in the new varieties will depend positively on the definition of property rights and the research effort. Fourth, changes in the level of property rights protection or research effort in one of the markets will have an inverse relationship with the quality of the new variety in the other market.

We use the case study of Argentina, and the United States, to evaluate the empirical implications of our theoretical model. We find that the market for soybean and corn seeds in Argentina operates according to our theoretical model. We observe that in countries like the United States soybean utility patents can protect research, while simple Plant Variety Protection Certificates (PVPCs) may be enough protection for some seeds like corn. However, in Argentina patent protection is not generally available for plant varieties and seed producers only have PVPCs according to the guidelines established by the UPOV 78. Given that Argentina is the third world exporter of soybean and one of the main producers of Genetically Modified soybean, the study of the lack of property rights protection on the soybean market, as compared to the corn market, would provide insightful results for the effect of property rights on biotechnology research.

We find that both domestic and foreign seed producers respond in a similar fashion to market incentives. According to what our model predicts, this bias in the enforcement of property rights generates an overprovision of corn seed varieties and under-provision of soybean varieties, even though Argentina has become one of the main producers of soybeans in world markets.

(4) Property Rights Legislation in Agricultural Biotechnology: A Comparative Perspective

This work analyzes the legal differences between the United States and Argentina, two of the most important exporters of grains in the world. As we show, the evolution of legislation and regulation in both countries help us to understand the challenges of generating homogeneous protection in international markets, as well as the incentives for private sector companies under different legal systems.

We highlight the differences in property rights protection, as well as the incentives for producers and traders. The comparative analysis in this work provides a useful framework to understand the complexities of international regulatory systems and the challenges that multinational and local seed producers face in developing countries with weak regulatory systems for the protection of property rights.

The implications of not creating and providing significant legal regimes protecting agricultural biotechnology innovation has significant impact in terms of the allocation of resources devoted to both indigenous research on plant innovation and also on the choices being made by growers acting in response to current weak property regimes.

(5) Organizing An International Symposium on Intellectual Property Protection for Ag-Biotechnology

We organized an international conference titled "Seeds of Change - A Link among Legal, Economic and Biotechnology Communities" from April 8-10, 2004. It provided an arena where 27 research papers were presented, written by various scholars. Some of them came from outside the U.S., such as Canada, Germany, Switzerland, Unite Kingdom, Japan, and Republic of Korea. These research papers extensively discuss and tirelessly analyze issues related R&D effort in agricultural biotechnology in relation to intellectual property protection regimes. These issues promote communications interpreting intellectual property protection regimes that face ever advancing biotechnology, assessing agribusiness whose economy exhibits countless potential in marketing food products promised by commercial applications of biotechnology, and evaluating the intellectual property protection regimes in the context of international issues such as impacts that biotechnology has on farming practice and biodiversity in the developing countries.

The main goal of this conference was to foster intellectual interests in issues that intertwine intellectual property protection regimes with advancements in agricultural biotechnology. This conference is one of the first attempts to bring together legal, economic and technological communities involved in these issues. It would mark a success by this conference if one witnesses more conferences in a future, where these communities meet and develop further discussions inspired by knowledge stored in a small cradle of life-seed.

Later this year, CABI Publishing from Oxford, UK, will be publishing an edited book based on this conference, Seeds of Change: Intellectual Property Protection for Agricultural Biotechnology.

Publications (all publications are online on the Social Science Research Network (SSRN) at http://www.ssrn.com

1. Seeds of Change: Intellectual Property Protection for Agricultural Biotechnology, edited by Jay P. Kesan (CABI Publishing 2006).
2. Obsolescence of Utility Patents and R&D Risk in the Consolidated U.S. Seed Market with S. Umeno in the Journal of Agricultural & Resource Economics, Vol. 29, No. 3 (December 2004), as part of the Western Agricultural Economic Association Honolulu Meeting proceeding.
3. Property Rights Legislation in Agricultural Biotechnology: United States and Argentina, with A. Gallo, Minn. J. L. Sci. & Tech., vol. 7, no. 2, pp. 565-598 (2006) (invited contribution).
4. Licensing Restrictions and Appropriating Market Benefits from Plant Innovation, edited remarks at Conference on Exploring the Limits: Recent Challenges to the Scope of IP Law, Fordham University, Nov. 18, 2005, New York, New York, to be published by the Fordham Intellectual Property, Media & Entertainment L.J., forthcoming 2006.
5. Property Rights and Incentives to Invest in Seed Varieties: Governmental Regulations in Argentina, with A. Gallo, AgBioForum, vol. 8, pp. 118-126(2005).
6. How Are Patent Cases Resolved? An Empirical Examination of the Adjudication and Settlement of Patent Disputes, with G. Ball, Wash. Univ. L. Rev., forthcoming 2006. This article was in the Top 5 Most Downloaded Articles on the Social Science Research Network (SSRN) for Articles in All Social Science Disciplines from Sept. to Dec. 2005.

Presentations

1. "Seed Production Contracts under Asymmetric Information: A Challenge for the Enforcement of IP Rights," with S. Umeno, Symposium: Seeds of Change-Intellectual Property Protection for Agricultural Biotechnology, UIUC, Apr. 8-10, 2004, Champaign, Illinois.
2. "Insecure Property Rights and Plant Varieties: The Effect on the Market for Seeds and Farmers in Argentina," with A. Gallo, Symposium: Seeds of Change-Intellectual Property Protection for Agricultural Biotechnology, UIUC, Apr. 8-10, 2004, Champaign, Illinois.
3. "Obsolescence of Utility Patents and R&D Risk in the Consolidated U.S. Seed Market," with S. Umeno, Northeastern Agricultural and Resource Economics Association (NAREA), Annual Meeting, June 20-23, 2004, Halifax, Nova Scotia.
4. "Obsolescence of Utility Patents and R&D Risk in the Consolidated U.S. Seed Market," with S. Umeno, Western Agricultural Economics Association (WAEA), Annual Meeting, June 30-July 2, 2004, Honolulu, Hawaii.
5. "Recent Developments in Intellectual Property Protection for Soybean Innovation-Law and Public Policy," 10th Biennial Conf. on the Cellular and Molecular Biology of the Soybean, Aug. 8-11, 2004, Columbia, Missouri.
6. "Adjudication and Settlement of Patent Disputes-An Empirical Study," with G. Ball, 4th Annual Midwest Law and Economics Association Meeting, University of Iowa College of Law, Oct. 8-9, 2004, Iowa City, Iowa.
7. Participant in Panel Discussion, Innovation and Dynamic Efficiency in Agricultural Biotechnology, Economic Research Service-USDA, Oct. 14-15, 2004, Washington, D.C.
8. "Insecure Property Rights and Plant Innovation: The Effect on the Market for Seeds in Argentina," with A. Gallo, 5th Annual Midwest Law and Economics Association Meeting, Northwestern University, Oct. 14-15, 2005, Chicago, Illinois.
9. "Overlapping Intellectual Property Protection for Agricultural Biotechnology," Faculty Seminar, Dept. of Agricultural &Consumer Economics, UIUC, Feb. 27, 2004.
10. Participated in an invitation-only Stanford-Berkeley Conference on Empirical Patent Research, Feb. 4, 2005, St. Helena, California.
11. "Intellectual Property: 9 Fundamentals and 1 Question," Int'l Symp. on "The Role of Law in Economic Development-Implications for China and the World," Dec. 5-6, 2005, Zhongshan University, Guangzhou, China.
12. "Intellectual Property: 9 Fundamentals and 1 Question," Dec. 9, 2005, Zeijiang University, Hangzhou, China.
13. Commentator, Panel on "The Technological and Scientific Frontier in East Asia," University of Illinois, Apr. 14, 2006, Champaign, Illinois.
14. "The Political Economy of the Patent System," Symp. on the Political Economy of Patent Reform, University of California, May 5, 2006, Berkeley, California.
15. Short Course on "Introduction to Intellectual Property," Chinese Shandong Province Public Administrators Program, University of Illinois, Aug. 28, 2003, Champaign, Illinois.
16. "Intellectual Property and Farming," Illinois Farm Bureau, Technology Issues Advisory Group, June 14, 2004, Bloomington, Illinois.