Experimentation, Patents, and Innovation

47 Pages Posted: 14 Oct 2008

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Kostas Bimpikis

Stanford Graduate School of Business

Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science

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Date Written: October 8, 2008

Abstract

This paper studies a simple model of experimentation and innovation. Our analysis suggests that patents may improve the allocation of resources by encouraging rapid experimentation and efficient ex post transfer of knowledge across firms. Each firm receives a private signal on the success probability of one of many potential research projects and decides when and which project to implement. A successful innovation can be copied by other firms. Symmetric equilibria (where actions do not depend on the identity of the firm) always involve delayed and staggered experimentation, whereas the optimal allocation never involves delays and may involve simultaneous rather than staggered experimentation. The social cost of insufficient experimentation can be arbitrarily large. Appropriately-designed patents can implement the socially optimal allocation (in all equilibria). In contrast to patents, subsidies to experimentation, research, or innovation cannot typically achieve this objective. We also show that when signal quality differs across firms, the equilibrium may involve a nonmonotonicity, whereby players with stronger signals may experiment after those with weaker signals. We show that in this more general environment patents again encourage experimentation and reduce delays.

Keywords: delay, experimentation, innovation, patents, research

JEL Classification: O31, D83, D92

Suggested Citation

Acemoglu, Daron and Bimpikis, Kostas and Ozdaglar, Asuman E., Experimentation, Patents, and Innovation (October 8, 2008). MIT Department of Economics Working Paper No. 08-19, Available at SSRN: https://ssrn.com/abstract=1281703 or http://dx.doi.org/10.2139/ssrn.1281703

Daron Acemoglu (Contact Author)

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Kostas Bimpikis

Stanford Graduate School of Business ( email )

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Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science ( email )

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