Abstract
This paper provides an insurance based argument behind patent infringement agreements (PIA). Such agreements constitute a form of ‘cooperation’ in an otherwise non-cooperative environment. We develop a model where firms initially hold certain patents and undertake further R&D. By pursuing the latter they face a positive probability of infringing the patents held by the other. A prior infringement agreement generates a binding contract, so that such infringements would go unpunished. If the infringing probability is not too ‘low’, firms would have incentive to sign an agreement and sacrifice the monopoly option. But, this depends on the information structure about the patent infringement and search costs. Such a prior agreement is then compared and contrasted with a suitably designed ex post contract.
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