Anti-piracy enforcements and innovation quality

What the paper says

Abstract This paper analyzes the effectiveness of public enforcement in combating piracy and promoting innovation. Our analysis emphasizes that the design of enforcement policy must take into account not only the intensity of enforcement but also its form and structural constraints. We show that under a social welfare–maximizing regime, optimal enforcement always eliminates piracy but cannot fully prevent a decline in innovation quality as piracy rises. When this decline significantly reduces welfare, the government intensifies enforcement to block piracy and restore monopoly outcomes. However, when enforcement is constrained by a proportional fine structure, the government optimally tolerates some piracy, with no monitoring as the best response. Strengthening fines reduces piracy, but does not eliminate it, until a threshold is reached where the optimal enforcement restores the monopoly outcome, often at a lower piracy level than under welfare maximization. We also find that private enforcement yields outcomes identical to public enforcement when the government pursues social welfare maximizing objective.