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Patent policy, imitation incentives, and the rate of cumulative innovation

Silvana Krasteva, Priyanka Sharma and Chu Wang

Journal of Economic Behavior & Organization, 2020, vol. 178, issue C, 509-533

Abstract: We study an infinite-horizon cumulative innovation model, in which patents are characterized by their length and the likelihood of being ruled valid in a patent infringement litigation. Strengthening patent protection via a greater validity or length has two opposing effects on innovation: 1) a negative litigation effect due to increasing the litigation threat for future innovators; and 2) a positive competition effect due to reducing profit-eroding imitation by competitive firms without innovation capacity. The optimal innovation-maximizing patent policy balances these two opposing effects. For moderate patent validity, longer remaining lifetime increases innovation due to the competition effect. The opposite is true for higher validity, for which the litigation effect dominates. Moderate validity and infinite patent length maximizes innovation when future profits are subject to greater discounting and R&D costs are low, while strong validity and finite length stimulates more innovation under lower discounting and higher R&D costs.

Keywords: Patent policy; Patent validity; Patent length; Imitation; Litigation; Cumulative innovation (search for similar items in EconPapers)
JEL-codes: K4 L1 O3 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:178:y:2020:i:c:p:509-533

DOI: 10.1016/j.jebo.2020.07.025

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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