Optimal Combination of Patent Instruments in a Cumulative-Innovation Growth Model

We develop a tractable general equilibrium model of cumulative innovation and growth to study the optimal combinations of three patent instruments: a patentability requirement to protect against future incremental innovation, a patent breadth to protect against current imitation, and the patent length governing the duration of its validity. New ideas strictly build upon frontier technologies, with the size of productivity improvements drawn from a stochastic distribution. The model features positive knowledge spillovers, and we discuss when this leads to under-investment in R&D in the market equilibrium relative to the social planner’s benchmark. We characterize analytically how each patent instrument affects research incentives, and further establish that the patentability requirement and patent breadth in the welfare-maximizing combination are each set at a strictly lower level than in the R&D-maximizing combination. Calibrating the model to aggregate data, the welfare-maximizing combination of instruments features a large patent breadth, a long patent duration, but a modest patentability requirement. The quantitative analysis points to sizeable welfare gains from these patent policies, while highlighting the importance of having multiple patent instruments. (Copyright: Elsevier)