Direction of Innovation
Posted: 18 Oct 2013
Date Written: October 1, 2013
The efficient rate of inventive activity is well-studied in models where only one invention follows the previous one; less understood is the efficient choice of which project to work on when there is a network of inventions. We present a general and tractable model of the direction of innovation, and fully characterize social optima and firm equilibria. Even when firms exert the proper amount of total effort on R&D, competition can distort the choice of direction. Socially inefficient direction choice can be explained by three interacting effects: firms can free ride on future potential inventions made possible by other firms, so they only maximize payoffs in excess of that free riding; firms do not fully account for the value of future research lines they make possible; and firms do not fully account for the time at which they make available future research lines. As an application, we show that strong patents for pioneer inventors cannot fully fix these inefficiencies. When multiple projects are available, strong pioneer patents instead can encourage firms to make technological achievements as fast as possible, rather than in the manner most conducive to future development.
Keywords: Direction, Innovation, Intellectual property, R&D, competition
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