Optimal Patent Breadth in a Two-Sector Economy

HEC School of Management Working Paper

Posted: 24 May 1999

See all articles by Ai-Ting Goh

Ai-Ting Goh

HEC Paris - Economics & Decision Sciences

Jacques Olivier

HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR)

Abstract

We consider an endogenous growth model with two sectors: an intermediate input (or "upstream") sector and a final product (or "downstream") sector. Innovation takes place in both sectors. Following Gilbert and Shapiro (1990), we define patent breadth as the ability of the innovator to reap profits as a result of the patent protection. Greater patent breadth in the downstream sector increases the incentives of agents to do R&D in that sector but discourages innovation in the upstream sector because of a market size effect. As a result, patent protection in upstream and downstream sectors have opposite effects on GDP growth: patent protection in the upstream sector accelerates growth while patent protection in the downstream sector slows it down. We show that regardless of parameter values, welfare maximizing, rate of innovation maximizing and output growth maximizing patent breadths are the same in the upstream sector but not in the downstream sector where they can be ranked. We also show the welfare maximizing patent protection is larger in the upstream.

JEL Classification: L16, O31, O41

Suggested Citation

Goh, Ai-Ting and Olivier, Jacques, Optimal Patent Breadth in a Two-Sector Economy. HEC School of Management Working Paper. Available at SSRN: https://ssrn.com/abstract=147010

Ai-Ting Goh (Contact Author)

HEC Paris - Economics & Decision Sciences ( email )

Paris
France
(33 1) 39 67 72 06 (Phone)
(33 1) 39 67 70 85 (Fax)

Jacques Olivier

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 3967 7297 (Phone)
+33 1 3967 7085 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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