| The dissertation analyzes the factors that affect the existence and persistence of informal markets and the way their presence influences the process of innovation in the formal sector by combining a theoretical and an empirical approach.; In the first chapter, a simple model of interactions between the demand side, the supply side and the government is introduced to explain the existence and persistence of informal markets. The model shows it is not always in the best interest of the firms in the formal sector to deter entrance of informal market suppliers, since their existence allows formal producers to "skim" the market. Similarly, the government does not always have an incentive to implement a harsh prosecution level against informal activities, since the presence of an informal market may allow consumers to attain higher utility levels.; The second chapter features a dynamic model of interactions between the demand side, the supply side and the government sector in order to explain the impact of informal markets on the innovation process by the formal producers. Contrary to common belief, it is shown that for adequate schedules of innovation costs and suitable supervision levels by the government, the presence of informal markets fosters innovation, even when imitation rates are instantaneous.; Based on the previous models, chapter three features an empirical estimation of piracy rates in the software industry and derives some policy recommendations to help reduce them. The paper introduces a model of software piracy where the piracy rate depends on three categories of explanatory variables: returns on the legal sector, factors that either promote or hinder software piracy and country specific observables that affect piracy rates indirectly. A panel of 54 countries over an 8-year period is used to estimate this model, contrasting between cross-section and longitudinal techniques. The paper shows country-heterogeneity plays an important role in determining the software piracy rate of countries, rendering policy recommendations stemming from cross-sectional data erroneous. Finally, using the correct specification, the paper introduces some policy recommendations regarding the efficacy of the different ways to fight software piracy. |
