A Minimum Optimal Patent Term

Abstract:     
Most investigations of the optimal patent term problems have followed Nordhaus's assumption that the optimal patent term balances the incentives necessary to encourage innovation against the inefficiencies associated with the monopoly right. Nordhaus relied on a static model of innovation in which all investment in research and all innovation occur at a fixed time t = 0. Increases in patent life cannot stimulate earlier innovation in the Nordhaus model, and so a longer patent life unambiguously pushes the date of patent expiration later, thereby delaying the time at which the innovation enters the public domain and creating the tradeoff between greater innovation and increased monopoly distortions. If, however, innovation is modeled in a fully dynamic fashion - i.e., where the times of investment in innovation and of innovation are not fixed but are instead allowed to vary - the time of patent expiration becomes a "U-shaped" function of patent life. Below a certain minimum patent term, increases in patent life result not only in earlier innovation but also in earlier patent expiration and thus earlier elimination of monopoly distortions. This paper demonstrates that this minimum patent term constitutes a minimum optimal patent term - i.e., it is a patent term that is equal to, or less than, the optimal patent term for any given invention without regard to the size of the deadweight loss caused by the patent. Increasing patent life up to this term involves no tradeoff but instead unambiguously increases social welfare. Relying on both deterministic and stochastic models, this paper predicts that, if reasonable assumptions about the rates of discount and economic growth are used, this minimum optimal term should be between approximately one to three decades. Furthermore, the paper shows that, while increasing patent term beyond the minimum optimal term can lead to greater social gains under certain circumstances, in all circumstances the minimum optimal term allows society to capture a substantial fraction of the maximum social benefit that theoretically could be achieved if a fully optimal patent term were set for each invention. The paper suggests that, if administrative costs require society to select a single patent term that is generally applicable for all inventions, then the minimum optimal term provides an attractive benchmark for that generally applicable patent term.

Keywords: patents, patent term, optimal patent term, optimal patent life

JEL Classifications: O300

Working Paper Series