Patent Protection as a Tax on Competition and Innovation

Pedro Bento

No 13-13, Working Papers from Department of Economics, West Virginia University

Abstract: I introduce patents into a general equilibrium model of innovation, where innovators choose between creating a new product market and competing in an existing market. Patent holders demand royalties from sequential innovators, but are constrained by the ability of innovators to work around patents. I show patent protection acts as a net tax on sequential innovators, reducing both competition and productivity growth. Calibrated to match moments from U.S. data, the model predicts that eliminating patent protection in the U.S. would generate a 23% increase in steady-state productivity growth as well as an increase in welfare equivalent to that from a 16% increase in annual consumption. I test several implications of the model using both U.S. and cross-country data. Consistent with the model, the data suggests an increase in the strength of patent protection reduces both productivity growth and the average quality of innovations.

Keywords: patent protection; competition; innovation; productivity; regulation; growth (search for similar items in EconPapers)
JEL-codes: O1 O4 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013-10
New Economics Papers: this item is included in nep-com, nep-dge, nep-gro, nep-ino, nep-ipr, nep-pr~ and nep-reg
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