Experimentation, Patents, and Innovation
AbstractThis paper studies a simple model of experimentation and innovation. Our analysis suggests that patents may improve the allocation of resources by encouraging rapid experimentation and efficient ex post transfer of knowledge across firms. Each firm receives a private signal on the success probability of one of many potential research projects and decides when and which project to implement. A successful innovation can be copied by other firms. Symmetric equilibria (where actions do not depend on the identity of the firm) always involve delayed and staggered experimentation, whereas the optimal allocation never involves delays and may involve simultaneous rather than staggered experimentation. The social cost of insufficient experimentation can be arbitrarily large. Appropriately-designed patents can implement the socially optimal allocation (in all equilibria). In contrast to patents, subsidies to experimentation, research, or innovation cannot typically achieve this objective. We also show that when signal quality differs across firms, the equilibrium may involve a nonmonotonicity, whereby players with stronger signals may experiment after those with weaker signals. We show that in this more general environment patents again encourage experimentation and reduce delays.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14408.
Date of creation: Oct 2008
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Other versions of this item:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-21 (All new papers)
- NEP-INO-2008-10-21 (Innovation)
- NEP-IPR-2008-10-21 (Intellectual Property Rights)
- NEP-KNM-2008-10-21 (Knowledge Management & Knowledge Economy)
- NEP-MIC-2008-10-21 (Microeconomics)
- NEP-PPM-2008-10-21 (Project, Program & Portfolio Management)
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