The demand for a stronger patenting system has become in the recent period a major source of tension between the U.S. government and the E.U. The US demand is generally motivated by the conventional economic wisdom affirming that a strong patenting system yields convenient incentives for the private investment in Research and Development (R&D) and hence, for technical progress in Society. This rather mechanistic approach of technological dynamics and of the role of the patenting is mainly based on the neoclassical theory of technical progress that strongly focuses on the agents' incentives rather than on the dynamics of the existent technological systems. Other appreciations of the existing patenting systems have nevertheless continued to be quite critical (see Machlup (1958) and Penrose (1951)). These appreciations are generally based on approaches where the nature of the actual technologies plays a central role. Moreover, the first part of the opinion emitted by Machlup in the above excerpt becomes very urgent since the question of establishing a strong patenting system is actually scrutinized for some industries in Europe (like the software industry) and in some countries (like Russia and China). We should hence consider the social costs of the patenting system, as well as its advantages, in order to guide such decisions. More specifically, it is time to seriously consider and check the old and new criticism of this system. The shortcomings of the standard wisdom have more recently been pointed out by Merges & Nelson (1990) and Mazzoleni & Nelson (1998). We propose to reassess the theoretical social value of patenting through a model founded on the approach adopted by these more empirical and conceptual studies.

We develop a simulation model based on the Nelson & Winter (1982), part V. This basic model is completed by a patent system that allows the protection of the innovations. We therefore use this model for evaluating the efficiency of this system under different technological conditions emphasized by Merges & Nelson (1990) and as a function of different dimensions of patents (mainly their length and their breadth). An econometric study of the results from Monte Carlo simulations is used to evaluate the determinants of the Social costs and benefits of patents. These social effects are mainly characterized at two levels: at the level of the efficiency of the technical progress in the industry, and at the level of the social surplus.

The neoclassical approaches conclude to a positive effect on both dimensions. Evolutionary approaches point at the contingency of these results with respect to the technological particularities of the industries. For example, Merges & Nelson (1990) distinguishes four classes of technologies in which the role of patents can be strongly contrasted: discrete inventions, cumulative technologies, chemical technologies and sciencebased technologies. We propose to include the specificities of these classes in our analysis, through different calibrations of the technology space of our industry dynamics model. The results of the simulations will then allow us to check the effectiveness of the patenting system in different configurations and with different characteristics measuring its strength.

References

Hall, B. (2002), "Current issues and trends in the economics of patents", Lecture to the ESSID Summer School in Industrial Dynamics

Hall, B. & Ham Ziedonis, R. M. (2001), The effects of strengthening patent rights on firms engaged in cumulative innovation: Insights from the semiconductor industry, in G. Libecap, ed., "Entrepreneurial Inputs and Outcomes: New Studies of Entrepreneurship in the United States", Vol. 13 of Advances in the Study of Entrepreneurship, Innovation, and Economic Growth, Elsevier Science, Amsterdam.

Jaffe, A. B. (2000), "The u.s. patent system in transition: Policy innovation and the innovation process", Research Policy 29, 531–557. Machlup, F. (1958), "An economic review of the patent system", Study No. 15 of Commission on Judiciary, Sub comm. on Patents, Trademarks, and Copyrights, 85th Congress, 2d Session.

Mazzoleni, R. & Nelson, R. R. (1998), "The benefits and costs of strong patent protection: A contribution to the current debate", Research Policy 27, 273–284.

Merges, R. & Nelson, R. R. (1990), "On the complex economics of patent scope", Columbia Law Review 90, 839–916.

Nelson, R. R. & Winter, S. (1982), An Evolutionary Theory of Economic Change, The Belknap Press of Harvard University, London.

Penrose, E. (1951), The Economics of the International Patent System, John Hopkins University Press, Baltimore">

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Technological and Social Costs and Benefits of Patent Systems

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Murat Yildizoglu
Thomas Vallée

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Abstract

"If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it." Machlup (1958) - cited by Hall (2002)

The demand for a stronger patenting system has become in the recent period a major source of tension between the U.S. government and the E.U. The US demand is generally motivated by the conventional economic wisdom affirming that a strong patenting system yields convenient incentives for the private investment in Research and Development (R&D) and hence, for technical progress in Society. This rather mechanistic approach of technological dynamics and of the role of the patenting is mainly based on the neoclassical theory of technical progress that strongly focuses on the agents' incentives rather than on the dynamics of the existent technological systems. Other appreciations of the existing patenting systems have nevertheless continued to be quite critical (see Machlup (1958) and Penrose (1951)). These appreciations are generally based on approaches where the nature of the actual technologies plays a central role. Moreover, the first part of the opinion emitted by Machlup in the above excerpt becomes very urgent since the question of establishing a strong patenting system is actually scrutinized for some industries in Europe (like the software industry) and in some countries (like Russia and China). We should hence consider the social costs of the patenting system, as well as its advantages, in order to guide such decisions. More specifically, it is time to seriously consider and check the old and new criticism of this system. The shortcomings of the standard wisdom have more recently been pointed out by Merges & Nelson (1990) and Mazzoleni & Nelson (1998). We propose to reassess the theoretical social value of patenting through a model founded on the approach adopted by these more empirical and conceptual studies.

We develop a simulation model based on the Nelson & Winter (1982), part V. This basic model is completed by a patent system that allows the protection of the innovations. We therefore use this model for evaluating the efficiency of this system under different technological conditions emphasized by Merges & Nelson (1990) and as a function of different dimensions of patents (mainly their length and their breadth). An econometric study of the results from Monte Carlo simulations is used to evaluate the determinants of the Social costs and benefits of patents. These social effects are mainly characterized at two levels: at the level of the efficiency of the technical progress in the industry, and at the level of the social surplus.

The neoclassical approaches conclude to a positive effect on both dimensions. Evolutionary approaches point at the contingency of these results with respect to the technological particularities of the industries. For example, Merges & Nelson (1990) distinguishes four classes of technologies in which the role of patents can be strongly contrasted: discrete inventions, cumulative technologies, chemical technologies and sciencebased technologies. We propose to include the specificities of these classes in our analysis, through different calibrations of the technology space of our industry dynamics model. The results of the simulations will then allow us to check the effectiveness of the patenting system in different configurations and with different characteristics measuring its strength.

References

Hall, B. (2002), "Current issues and trends in the economics of patents", Lecture to the ESSID Summer School in Industrial Dynamics

Hall, B. & Ham Ziedonis, R. M. (2001), The effects of strengthening patent rights on firms engaged in cumulative innovation: Insights from the semiconductor industry, in G. Libecap, ed., "Entrepreneurial Inputs and Outcomes: New Studies of Entrepreneurship in the United States", Vol. 13 of Advances in the Study of Entrepreneurship, Innovation, and Economic Growth, Elsevier Science, Amsterdam.

Jaffe, A. B. (2000), "The u.s. patent system in transition: Policy innovation and the innovation process", Research Policy 29, 531–557. Machlup, F. (1958), "An economic review of the patent system", Study No. 15 of Commission on Judiciary, Sub comm. on Patents, Trademarks, and Copyrights, 85th Congress, 2d Session.

Mazzoleni, R. & Nelson, R. R. (1998), "The benefits and costs of strong patent protection: A contribution to the current debate", Research Policy 27, 273–284.

Merges, R. & Nelson, R. R. (1990), "On the complex economics of patent scope", Columbia Law Review 90, 839–916.

Nelson, R. R. & Winter, S. (1982), An Evolutionary Theory of Economic Change, The Belknap Press of Harvard University, London.

Penrose, E. (1951), The Economics of the International Patent System, John Hopkins University Press, Baltimore

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 24.

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Keywords: Patent system social welfare public policy intellectual property rights industrial dynamics

Find related papers by JEL classification:
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
O34 - Economic Development, Technological Change, and Growth - - Technological Change - - - Intellectual Property Rights
O38 - Economic Development, Technological Change, and Growth - - Technological Change - - - Government Policy

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  1. Wesley M. Cohen & Richard R. Nelson & John P. Walsh, 2000. "Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)," NBER Working Papers 7552, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Mazzoleni, Roberto & Nelson, Richard R., 1998. "The benefits and costs of strong patent protection: a contribution to the current debate," Research Policy, Elsevier, vol. 27(3), pages 273-284, July. [Downloadable!] (restricted)
  3. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March. [Downloadable!] (restricted)
    Other versions:
  4. Nancy Gallini & Suzanne Scotchmer, 2002. "Intellectual Property: When Is It the Best Incentive System?," Law and Economics 0201001, EconWPA. [Downloadable!]
    Other versions:
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