Optimal Patent Breadth: Quantifying the Effects of Increasing Patent Breadth

In a generalized quality-ladder growth model, this paper firstly derives the optimal patent breadth and the socially optimal profit-sharing arrangement between patentholders. In this general-equilibrium setting, it identifies and derives a dynamic distortion of markup pricing on capital accumulation that has been neglected by previous studies on patent policy. Then, it quantitatively evaluates the effects of eliminating blocking patent and increasing patent breadth, and this exercise suggests a number of findings. Firstly, the market economy underinvests in R&D so long as a non-negligible fraction of long-run TFP growth is driven by R&D. Secondly, increasing patent breadth may be an effective solution to R&D underinvestment. The resulting effect on long-run consumption can be substantial because the harmful distortionary effects are relatively insignificant. However, the damaging effect of blocking patent arising from suboptimal profit-sharing arrangements between patentholders can be quantitatively significant. Finally, it considers the effect on consumption during the transition dynamics.