Do Patents Matter? Empirical Evidence on the Incentive Thesis

Abstract

The incentive thesis supplies the primary rationale for the patent system: without an exclusionary right, firms will decline to invest in innovations that are subject to expropriation. Empirical inquiry into the incentive thesis’ scope of application has yielded complex results, which are often selectively cited or described incompletely in policy debates. This literature review broadly surveys relevant empirical studies. Taken as a whole, the evidence supports three propositions with a reasonable degree of confidence. First, patents’ incentive effect is a positive function of the difference between innovation costs and imitation costs. Second, patents’ incentive effect is an inverse function of the “appropriation strength” of alternative non-patent instruments by which to increase third-parties’ imitation costs. Third, patents’ incentive effect is a diminishing marginal function of patent strength and, in some cases, can even be reversed beyond a certain level of patent strength.