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The reward and contract theories of patents in a model of endogenous growth

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  • Klein, Michael A.

Abstract

I develop a general equilibrium model of endogenous growth to jointly analyze two distinct theories of the patent system’s social value: (1) that patents stimulate innovation by enhancing private incentives to invest in R&D (reward theory) and (2) that patents disseminate technical information into the public domain through disclosure requirements (contract theory). The model features endogenous innovator selection into patents versus secrecy based on heterogeneous innovation size, the effective cost of disclosure, and expected licensing revenue from holding a patent. Innovation is cumulative, patent rights overlap across industries, and new innovators pay mandatory licensing fees to a subset of previous innovators if those innovators hold a patent. The economy’s endogenous patent propensity determines each new innovator’s licensing burden, consistent with the concept of patent thickets. The model captures the inherent tension between the two objectives of the patent system. In most cases, I find that stronger patent protection stifles innovation and reduces social welfare.

Suggested Citation

  • Klein, Michael A., 2022. "The reward and contract theories of patents in a model of endogenous growth," European Economic Review, Elsevier, vol. 147(C).
  • Handle: RePEc:eee:eecrev:v:147:y:2022:i:c:s0014292122001003
    DOI: 10.1016/j.euroecorev.2022.104178
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    More about this item

    Keywords

    Innovation; Patent policy; Patent thickets; Patent puzzle; Trade secrets; Endogenous growth;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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