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Experimentation, Patents, and Innovation

  • Daron Acemoglu
  • Kostas Bimpikis
  • Asuman Ozdaglar

This paper studies a simple model of experimentation and innovation. Our analysis suggests that patents improve the allocation of resources by encouraging rapid experimentation and efficient ex post transfer of knowledge. Each firm receives a signal on the success probability of a project and decides when to experiment. Successes can be copied. First, we assume that signal qualities are the same. Symmetric equilibria involve delayed and staggered experimentation, whereas the optimal allocation never involves delays and may involve simultaneous experimentation. Appropriately designed patents implement the optimal allocation. Finally, we discuss the case when signals differ and are private information. (JEL D82, D83, O31, O33, O34)

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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 3 (2011)
Issue (Month): 1 (February)
Pages: 37-77

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Handle: RePEc:aea:aejmic:v:3:y:2011:i:1:p:37-77
Note: DOI: 10.1257/mic.3.1.37
Contact details of provider: Web page: https://www.aeaweb.org/aej-micro
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  1. Cripps, Martin & Keller, Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," Discussion Papers in Economics 4, University of Munich, Department of Economics.
  2. Nancy Gallini & Suzanne Scotchmer, 2002. "Intellectual Property: When Is It the Best Incentive System?," NBER Chapters, in: Innovation Policy and the Economy, Volume 2, pages 51-78 National Bureau of Economic Research, Inc.
  3. Simon, Leo K. & Stinchcombe, Maxwell B., 1987. "Extensive From Games in Continuous Time: Pure Strategies," Department of Economics, Working Paper Series qt03x115sh, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Richard Gilbert and Carl Shapiro., 1989. "Optimal Patent Length and Breadth," Economics Working Papers 89-102, University of California at Berkeley.
  5. Bulow, Jeremy & Klemperer, Paul, 1994. "Rational Frenzies and Crashes," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 1-23, February.
  6. Suzanne Scotchmer, 1999. "On the Optimality of the Patent Renewal System," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 181-196, Summer.
  7. Kenneth Hendricks & Dan Kovenock, 1989. "Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 164-182, Summer.
  8. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  9. Kitch, Edmund W, 1977. "The Nature and Function of the Patent System," Journal of Law and Economics, University of Chicago Press, vol. 20(2), pages 265-90, October.
  10. Kapur, Sandeep, 1995. "Technological Diffusion with Social Learning," Journal of Industrial Economics, Wiley Blackwell, vol. 43(2), pages 173-95, June.
  11. Reinganum, Jennifer F., 1981. "Dynamic games of innovation," Journal of Economic Theory, Elsevier, vol. 25(1), pages 21-41, August.
  12. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers 392, C.E.P.R. Discussion Papers.
  13. Hendricks, Kenneth & Weiss, Andrew & Wilson, Charles, 1987. "The War of Attrition in Continuous Time with Complete Information," Working Papers 87-03, C.V. Starr Center for Applied Economics, New York University.
  14. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  15. Fudenberg, Drew & Tirole, Jean, 1986. "A Theory of Exit in Duopoly," Econometrica, Econometric Society, vol. 54(4), pages 943-60, July.
  16. Taylor, Curtis R, 1995. "Digging for Golden Carrots: An Analysis of Research Tournaments," American Economic Review, American Economic Association, vol. 85(4), pages 872-90, September.
  17. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  18. Gul, Faruk & Lundholm, Russell, 1995. "Endogenous Timing and the Clustering of Agents' Decisions," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1039-66, October.
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