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When do more patents reduce R&D?

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  • Robert M. Hunt

Abstract

This paper develops a simple duopoly model in which investments in R&D and patents are inputs in the production of firm rents. Patents are necessary to appropriate the returns to the firm’s own R&D, but patents also create potential claims against the rents of rival firms. Analysis of the model reveals a general necessary condition for the existence of a positive correlation between the firm’s R&D intensity and the number of patents it obtains. When that condition is violated, changes in exogenous parameters that induce an increase in firms’ patenting can also induce a decline in R&D intensity. Such a negative relationship is more likely when (1) there is sufficient overlap in firms’ technologies so that each firm’s inventions are likely to infringe the patents of another firm, (2) firms are sufficiently R&D intensive, and (3) patents are cheap relative to both the cost of R&D and the value of final output.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 06-6.

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Date of creation: 2006
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Handle: RePEc:fip:fedpwp:06-6

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Keywords: Patents ; Research and development;

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References

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  1. Richard Gilbert and Carl Shapiro., 1989. "Optimal Patent Length and Breadth," Economics Working Papers, University of California at Berkeley 89-102, University of California at Berkeley.
  2. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 392, C.E.P.R. Discussion Papers.
  3. Bronwyn H. Hall, 2005. "Exploring the Patent Explosion," The Journal of Technology Transfer, Springer, Springer, vol. 30(2_2), pages 35-48, 01.
  4. Joseph Farrell & Carl Shapiro, 2008. "How Strong Are Weak Patents?," American Economic Review, American Economic Association, American Economic Association, vol. 98(4), pages 1347-69, September.
  5. Reinganum, Jennifer F, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(1), pages 81-99, February.
  6. Adam B. Jaffe & Josh Lerner & Scott Stern, 2007. "Innovation Policy and the Economy, Volume 7," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number jaff07-1.
  7. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 94(2), pages 429-36, March.
  8. Jay Pil Choi, 2003. "Pools and Cross-Licensing in the Shadow of Patent Litigation," CESifo Working Paper Series, CESifo Group Munich 1070, CESifo Group Munich.
  9. Shapiro, Carl, 2003. " Antitrust Limits to Patent Settlements," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 34(2), pages 391-411, Summer.
  10. Wesley M Cohen & Richard R Nelson & John P Walsh, 2003. "Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (Or Not)," Levine's Working Paper Archive 618897000000000624, David K. Levine.
  11. James Bessen, 2004. "Patent Thickets: Strategic Patenting of Complex Technologies," Working Papers, Research on Innovation 0401, Research on Innovation.
  12. Robert M. Hunt, 1999. "Nonobviousness and the incentive to innovate: an economic analysis of intellectual property reform," Working Papers, Federal Reserve Bank of Philadelphia 99-3, Federal Reserve Bank of Philadelphia.
  13. Carl Shapiro, 2001. "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Setting," NBER Chapters, National Bureau of Economic Research, Inc, in: Innovation Policy and the Economy, Volume 1, pages 119-150 National Bureau of Economic Research, Inc.
  14. Robert M. Hunt, 2006. "When do more patents reduce R&D?," Working Papers, Federal Reserve Bank of Philadelphia 06-6, Federal Reserve Bank of Philadelphia.
  15. Robert M Hunt, 2003. "Patentability, Industry Structure and Innovation," Levine's Working Paper Archive 618897000000000689, David K. Levine.
  16. Rosemarie Ham Ziedonis, 2004. "Don't Fence Me In: Fragmented Markets for Technology and the Patent Acquisition Strategies of Firms," Management Science, INFORMS, INFORMS, vol. 50(6), pages 804-820, June.
  17. James Bessen & Robert M. Hunt, 2004. "An empirical look at software patents," Working Papers, Federal Reserve Bank of Philadelphia 03-17, Federal Reserve Bank of Philadelphia.
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Citations

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Cited by:
  1. Guido Cozzi & Silvia Galli, 2009. "Upstream Innovation Protection: Common Law Evolution and the Dynamics of Wage Inequality," Working Papers, Business School - Economics, University of Glasgow 2009_20, Business School - Economics, University of Glasgow.
  2. Alexandre Almeida & Aurora A.C. Teixeira, 2008. "One size does not fit all… An economic development perspective on the asymmetric impact of Patents on R&D," FEP Working Papers, Universidade do Porto, Faculdade de Economia do Porto 292, Universidade do Porto, Faculdade de Economia do Porto.
  3. Gaétan de Rassenfosse & Bruno Van Pottelsberghe, 2010. "The Role of Fees in Patent Systems: Theory and Evidence," Working Papers ECARES, ULB -- Universite Libre de Bruxelles ECARES 2010-023, ULB -- Universite Libre de Bruxelles.
  4. Robert M. Hunt, 2007. "Economics and the design of patent systems," Working Papers, Federal Reserve Bank of Philadelphia 07-6, Federal Reserve Bank of Philadelphia.
  5. Robert M. Hunt, 2006. "When Do More Patents Reduce R&D?," Levine's Bibliography 122247000000001065, UCLA Department of Economics.
  6. Iain Clacher,, 2010. "National accounting for intangible assets in the knowledge economy," Journal of Financial Regulation and Compliance, Emerald Group Publishing, Emerald Group Publishing, vol. 18(2), pages 106-119, May.
  7. Che, XiaoGang & Yang, Yibai & Zhang, Haoyu, 2010. "Outsourcing and R&D Investment with Costly Patent Protection," MPRA Paper 25516, University Library of Munich, Germany.
  8. Guido Cozzi & Silvia Galli, 2009. "Science-Based R&D In Schumpeterian Growth," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 56(s1), pages 474-491, 09.
  9. Arijit Mukherjee, 2013. "Patent protection under endogenous product differentiation," Discussion Paper Series, Department of Economics, Loughborough University 2013_06, Department of Economics, Loughborough University, revised Jul 2013.
  10. Alexandre Almeida & Aurora A.C. Teixeira, 2007. "Does Patenting negatively impact on R&D investment?An international panel data assessment," FEP Working Papers, Universidade do Porto, Faculdade de Economia do Porto 255, Universidade do Porto, Faculdade de Economia do Porto.
  11. Banerjee, Dyuti & Chatterjee, Ishita, 2010. "The impact of piracy on innovation in the presence of technological and market uncertainty," Information Economics and Policy, Elsevier, Elsevier, vol. 22(4), pages 391-397, December.

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