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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. Reinganum, Jennifer F, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 81-99, February.
  2. James Bessen & Robert M. Hunt, 2004. "An empirical look at software patents," Working Papers 03-17, Federal Reserve Bank of Philadelphia.
  3. Shapiro, Carl, 2003. " Antitrust Limits to Patent Settlements," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 391-411, Summer.
  4. Jay Pil Choi, 2003. "Pools and Cross-Licensing in the Shadow of Patent Litigation," CESifo Working Paper Series 1070, CESifo Group Munich.
  5. James Bessen, 2004. "Patent Thickets: Strategic Patenting of Complex Technologies," Working Papers 0401, Research on Innovation.
  6. Bronwyn H. Hall, 2004. "Exploring the Patent Explosion," NBER Working Papers 10605, National Bureau of Economic Research, Inc.
  7. Adam B. Jaffe & Josh Lerner & Scott Stern, 2007. "Innovation Policy and the Economy, Volume 7," NBER Books, National Bureau of Economic Research, Inc, number jaff07-1.
  8. Robert M Hunt, 2003. "Patentability, Industry Structure and Innovation," Levine's Working Paper Archive 618897000000000689, David K. Levine.
  9. Robert M. Hunt, 2006. "When do more patents reduce R&D?," Working Papers 06-6, Federal Reserve Bank of Philadelphia.
  10. Gilbert, R. & Shapiro, C., 1988. "Optimal Patent Length And Breadth," Papers 28, Princeton, Woodrow Wilson School - Discussion Paper.
  11. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers 392, C.E.P.R. Discussion Papers.
  12. 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.
  13. Carl Shapiro, 2004. "Navigating the Patent Thicket: Cross Licenses, Patent Pools and Standard Setting," Levine's Working Paper Archive 122247000000000539, David K. Levine.
  14. Robert M. Hunt, 1999. "Nonobviousness and the incentive to innovate: an economic analysis of intellectual property reform," Working Papers 99-3, Federal Reserve Bank of Philadelphia.
  15. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 429-36, March.
  16. Farrell, Joseph & Shapiro, Carl, 2007. "How Strong Are Weak Patents?," Competition Policy Center, Working Paper Series qt8vg425vj, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
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Citations

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Cited by:
  1. de Rassenfosse, Gaétan & van Pottelsberghe de la Potterie, Bruno, 2010. "The role of fees in patent systems: Theory and evidence," CEPR Discussion Papers 7879, C.E.P.R. Discussion Papers.
  2. Robert M. Hunt, 2006. "When do more patents reduce R&D?," Working Papers 06-6, Federal Reserve Bank of Philadelphia.
  3. Robert M. Hunt, 2007. "Economics and the design of patent systems," Working Papers 07-6, Federal Reserve Bank of Philadelphia.
  4. Iain Clacher,, 2010. "National accounting for intangible assets in the knowledge economy," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 18(2), pages 106-119, May.
  5. Alexandre Almeida & Aurora A.C. Teixeira, 2007. "Does Patenting negatively impact on R&D investment?An international panel data assessment," FEP Working Papers 255, Universidade do Porto, Faculdade de Economia do Porto.
  6. Guido Cozzi & Silvia Galli, 2009. "Science-Based R&D in Schumpeterian Growth," Working Papers 2009_19, Business School - Economics, University of Glasgow.
  7. Arijit Mukherjee, 2013. "Patent protection under endogenous product differentiation," Discussion Paper Series 2013_06, Department of Economics, Loughborough University, revised Jul 2013.
  8. Che, XiaoGang & Yang, Yibai & Zhang, Haoyu, 2010. "Outsourcing and R&D Investment with Costly Patent Protection," MPRA Paper 25516, University Library of Munich, Germany.
  9. Banerjee, Dyuti & Chatterjee, Ishita, 2010. "The impact of piracy on innovation in the presence of technological and market uncertainty," Information Economics and Policy, Elsevier, vol. 22(4), pages 391-397, December.
  10. Cozzi, Guido & Galli, Silvia, 2011. "Upstream innovation protection: common law evolution and the dynamics of wage inequality," MPRA Paper 31902, University Library of Munich, Germany.
  11. 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 292, Universidade do Porto, Faculdade de Economia do Porto.

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