Symbiotic Competition and Intellectual Property

Abstract

According to Nordhaus, the optimal life of a patent T* trades off the “embarrassment” of monopoly with motivating innovation, given that imitators would otherwise copy inventions and, in competing with innovators, reduce their profit, hence their incentive to innovate. In this paper, we extend this argument through a semi-endogenous growth model with follow-on innovations, knowledge spillovers and imperfectly elastic labor supply. We calibrate this model to the US economy and find T* between 8 and 14 years, in contrast with the current global standard of 20. A decomposition of T* suggests that knowledge spillovers are quantitatively just as important as market power. We also find that optimal patent policy depends crucially on the distribution of spillovers across industries. As such, we argue for a macroeconomic approach to patent policy.

Keywords: Optimal life of a patent, knowledge spillovers, semi-endogenous growth.

JEL Classification: D43, O11, O33, O34