Download This PaperPatent Policy, Imitation Incentives, and the Rate of Cumulative Innovation
41 Pages Posted: 28 Jun 2019 Last revised: 23 Jul 2020
Date Written: June 27, 2019
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
JEL Classification: K4, L1, O3
Suggested Citation: Suggested Citation