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Patent policy, imitation incentives, and the rate of cumulative innovation

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  • Krasteva, Silvana
  • Sharma, Priyanka
  • Wang, Chu

Abstract

We study an infinite-horizon cumulative innovation model, in which patents are characterized by their length and the likelihood of being ruled valid in a patent infringement litigation. Strengthening patent protection via a greater validity or length has two opposing effects on innovation: 1) a negative litigation effect due to increasing the litigation threat for future innovators; and 2) a positive competition effect due to reducing profit-eroding imitation by competitive firms without innovation capacity. The optimal innovation-maximizing patent policy balances these two opposing effects. For moderate patent validity, longer remaining lifetime increases innovation due to the competition effect. The opposite is true for higher validity, for which the litigation effect dominates. Moderate validity and infinite patent length maximizes innovation when future profits are subject to greater discounting and R&D costs are low, while strong validity and finite length stimulates more innovation under lower discounting and higher R&D costs.

Suggested Citation

  • Krasteva, Silvana & Sharma, Priyanka & Wang, Chu, 2020. "Patent policy, imitation incentives, and the rate of cumulative innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 178(C), pages 509-533.
    • Handle: RePEc:eee:jeborg:v:178:y:2020:i:c:p:509-533
    DOI: 10.1016/j.jebo.2020.07.025
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    More about this item

    Keywords

    Patent policy; Patent validity; Patent length; Imitation; Litigation; Cumulative innovation;
    All these keywords.

    JEL classification:

    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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