When economists speak of an underlying legal structure that imposes an “absolute permission” requirement on access to, and use of, knowledge goods protected by intellectual property rights (IPRs), they typically have in mind the domestic patent and copyright laws. Under these and related intellectual property regimes, one cannot normally make use of a protected invention or creative work of authorship for specified purposes and for limited periods of time without prior authorization of the rights holder, typically in the form of a license.

When economists speak of liability rules, in contrast, they envision an underlying legal structure that permits third parties to undertake certain actions without prior permission, provided that they compensate injured parties for all or part of the costs they inflict. While typical examples are found in tort laws regulating the abatement of nuisances, liability rules also abound in the realm of intellectual property law, where, however, their function has largely been overlooked or mischaracterized by legal and economic scholars. In this context, liability rules conjure up a regime built on a “take and pay” principle. Under such a regime, second comers can access and use the protected subject matter for specified purposes without permission, but they must compensate the first comer for these uses in one manner or another.

This chapter discusses new forms of liability rules that might profitably be used to stimulate local innovation in developing countries.