Home Country Bias in the Legal System: Empirical Evidence from the Intellectual Property Rights Protection in Canada

Are judges concerned with the effect of their decisions on national welfare in the same way as policy-makers do? In this paper we analyze this question by examining the outcomes of intellectual property rights (IPR) litigations between domestic and foreign .rms. We develop a simple model of oligopoly where foreign .rms have access to more efficient production technology and show that weak protection of foreign-owned IPR always leads to welfare gains at home. We also show that the positive welfare e¤ect increases with the size of the foreign innovator, as well as in the size of the domestic imitator. We test predictions of the model using the data on all Canadian IPR cases over a four-year period. We find that domestic firms are substantially more likely, by 17 percentage points, to succeed in litigations with foreign firms than with other Canadian firms. We also find evidence supporting the hypothesis of the home bias in the legal system. Specifically, we establish that courts' decisions are aligned with welfare maximization principles so that foreign firms are less likely to win in those cases when the implied welfare gains from not protecting foreign IPR are greater.