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When do more patents reduce R&D?

  • Robert M. Hunt

This paper develops a simple duopoly model in which investments in R&D and patents are inputs in the production of firm rents. Patents are necessary to appropriate the returns to the firm’s own R&D, but patents also create potential claims against the rents of rival firms. Analysis of the model reveals a general necessary condition for the existence of a positive correlation between the firm’s R&D intensity and the number of patents it obtains. When that condition is violated, changes in exogenous parameters that induce an increase in firms’ patenting can also induce a decline in R&D intensity. Such a negative relationship is more likely when (1) there is sufficient overlap in firms’ technologies so that each firm’s inventions are likely to infringe the patents of another firm, (2) firms are sufficiently R&D intensive, and (3) patents are cheap relative to both the cost of R&D and the value of final output.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 06-6.

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Date of creation: 2006
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Handle: RePEc:fip:fedpwp:06-6
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  1. Carl Shapiro, 2004. "Navigating the Patent Thicket: Cross Licenses, Patent Pools and Standard Setting," Levine's Working Paper Archive 122247000000000539, David K. Levine.
  2. Shapiro, Carl, 2001. "Antitrust Limits to Patent Settlements," Competition Policy Center, Working Paper Series qt87s5j911, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  3. Jay Pil Choi, 2003. "Pools and Cross-Licensing in the Shadow of Patent Litigation," CESifo Working Paper Series 1070, CESifo Group Munich.
  4. Robert M Hunt, 2003. "Patentability, Industry Structure and Innovation," Levine's Working Paper Archive 618897000000000689, David K. Levine.
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  7. Robert M. Hunt, 2006. "When Do More Patents Reduce R&D?," American Economic Review, American Economic Association, vol. 96(2), pages 87-91, May.
  8. James Bessen & Robert M. Hunt, 2007. "An Empirical Look at Software Patents," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(1), pages 157-189, 03.
  9. Paul Klemperer, 1990. "How Broad Should the Scope of Patent Protection Be?," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 113-130, Spring.
  10. Farrell, Joseph & Shapiro, Carl, 2007. "How Strong Are Weak Patents?," Competition Policy Center, Working Paper Series qt8vg425vj, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  11. Richard Gilbert and Carl Shapiro., 1989. "Optimal Patent Length and Breadth," Economics Working Papers 89-102, University of California at Berkeley.
  12. James Bessen, 2004. "Patent Thickets: Strategic Patenting of Complex Technologies," Working Papers 0401, Research on Innovation.
  13. Bronwyn H. Hall, 2005. "Exploring the Patent Explosion," The Journal of Technology Transfer, Springer, vol. 30(2_2), pages 35-48, 01.
  14. 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.
  15. Adam B. Jaffe & Josh Lerner & Scott Stern, 2007. "Innovation Policy and the Economy, Volume 7," NBER Books, National Bureau of Economic Research, Inc, number jaff07-1.
  16. Robert M. Hunt, 1999. "Nonobviousness and the incentive to innovate: an economic analysis of intellectual property reform," Working Papers 99-3, Federal Reserve Bank of Philadelphia.
  17. F. M. Scherer, 2005. "Patents," Books, Edward Elgar, number 3903, March.
  18. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 429-36, March.
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