Do Weaker Patents Induce Greater Research Investments?

Abstract

Can weakening patent protection incentivize innovation? I investigate the effects of weakened patent protection on innovation at public firms by exploiting differential exposure to the Supreme Court decision Alice v. CLS bank. I employ a difference-in-differences design to measure the impact of the Supreme Court decision on firms exposed to the Alice decision relative to control firms that are less exposed. I provide causal evidence that innovation, measured by R&D, responds positively to weakened patent protection. Going further, I compare the impact of the Supreme Court decision on R&D investment and patent applications across the cross section of differentially exposed firms to further support my hypothesis. My estimates suggest that overly broad intellectual property rights play a significant role in deterring innovation through the accumulation of patents as weapons in legal arms races amongst productive firms.

Keywords: Patent, Innovation, Alice

JEL Classification: O34, O32