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Cumulative Innovation, Growth and Welfare-Improving Patent Policy

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  • Edwin Lai

    (Hong Kong University of Science and Tech)

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    Abstract

    We construct a tractable general equilibrium model of cumulative innovation and growth, in which new ideas strictly improve upon frontier technologies, and productivity improvements are drawn in a stochastic manner. The presence of positive knowledge spillovers implies that the decentralized equilibrium features an allocation of labor to R&D activity that is strictly lower than the social planner's benchmark, which suggests a role for patent policy. We focus on a "non-infringing inventive step" requirement, which stipulates the minimum improvement to the best patented technology that a new idea needs to make for it to be patentable and non-infringing. We establish that there exists a finite required inventive step that maximizes the rate of innovation, as well as a separate optimal required inventive step that maximizes welfare, with the former being strictly greater than the latter. These conclusions are robust to allowing for the availability of an additional instrument in the form of patent length policy.

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    File URL: http://www.economicdynamics.org/meetpapers/2013/paper_854.pdf
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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 854.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:854

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    1. Sakakibara, Mariko & Branstetter, Lee, 2001. "Do Stronger Patents Induce More Innovation? Evidence from the 1988 Japanese Patent Law Reforms," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 77-100, Spring.
    2. Denicolo, Vincenzo, 1996. "Patent Races and Optimal Patent Breadth and Length," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 249-65, September.
    3. Robert M. Hunt, 2004. "Patentability, Industry Structure, and Innovation," Journal of Industrial Economics, Wiley Blackwell, vol. 52(3), pages 401-425, 09.
    4. Benjamin Moll & Robert E. Lucas, 2011. "Knowledge Growth and the Allocation of Time," 2011 Meeting Papers 1030, Society for Economic Dynamics.
    5. Kwan, Yum K. & Lai, Edwin L. -C., 2003. "Intellectual property rights protection and endogenous economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 27(5), pages 853-873, March.
    6. Paul Klemperer, 1990. "How Broad Should the Scope of Patent Protection Be?," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 113-130, Spring.
    7. Antonio Minniti & Carmelo Parello & Paul Segerstrom, 2013. "A Schumpeterian growth model with random quality improvements," Economic Theory, Springer, vol. 52(2), pages 755-791, March.
    8. repec:fth:bosecd:110 is not listed on IDEAS
    9. Michele Boldrin & David K Levine, 2008. "Against Intellectual Monopoly," Levine's Bibliography 122247000000002371, UCLA Department of Economics.
    10. Costas Arkolakis, 2009. "A Unified Theory of Firm Selection and Growth," CESifo Working Paper Series 2679, CESifo Group Munich.
    11. Jerry R. Green & Suzanne Scotchmer, 1995. "On the Division of Profit in Sequential Innovation," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 20-33, Spring.
    12. Jonathan Eaton & Samuel Kortum, 2001. "Technology, Trade, and Growth: A Unified Fremework," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-110, Boston University - Department of Economics.
    13. Nancy T. Gallini, 1992. "Patent Policy and Costly Imitation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 52-63, Spring.
    14. Jesse Perla & Christopher Tonetti, 2012. "Equilibrium Imitation and Growth," Working Papers 12-03, New York University, Leonard N. Stern School of Business, Department of Economics.
    15. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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