Patent Policy, Imitation Incentives, and the Rate of Cumulative Innovation

41 Pages Posted: 28 Jun 2019 Last revised: 23 Jul 2020

See all articles by Silvana Krasteva

Silvana Krasteva

Texas A&M University

Priyanka Sharma

Illinois Institute of Technology

Chu Wang

affiliation not provided to SSRN

Date Written: June 27, 2019

Abstract

We study an infinite-horizon cumulative innovation model, in which patents are characterized by
their length and the likelihood of being ruled valid in a patent infringement litigation. Strengthening
patent protection via a greater validity or length has two opposing effects on innovation: 1) a
negative litigation effect due to increasing the litigation threat for future innovators; and 2) a positive
competition effect due to reducing profit-eroding imitation by competitive firms without innovation
capacity. The optimal innovation-maximizing patent policy balances these two opposing effects. For
moderate patent validity, longer remaining lifetime increases innovation due to the competition effect. The opposite is true for higher validity, for which the litigation effect dominates. Moderate validity and infinite patent length maximizes innovation when future profits are subject to greater discounting and R&D costs are low, while strong validity and finite length stimulates more innovation under lower discounting and higher R&D costs.

Keywords: Patent policy, patent validity, patent length, imitation, litigation, cumulative innovation

JEL Classification: K4, L1, O3

Suggested Citation

Krasteva, Silvana Simeonova and Sharma, Priyanka and Wang, Chu, Patent Policy, Imitation Incentives, and the Rate of Cumulative Innovation (June 27, 2019). Journal of Economic Behavior and Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3411158 or http://dx.doi.org/10.2139/ssrn.3411158

Silvana Simeonova Krasteva (Contact Author)

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States
(979) 845-7384 (Phone)

HOME PAGE: http://econweb.tamu.edu/skrasteva/

Priyanka Sharma

Illinois Institute of Technology ( email )

10 West 35th Street, 18th Floor
Chicago, IL 60616
United States

HOME PAGE: http://mypages.iit.edu/~psharm21/

Chu Wang

affiliation not provided to SSRN

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