Patent Policy, Imitation Incentives, and the Rate of Cumulative Innovation

We study an infinite horizon cumulative innovation model, in which strengthening patent protection has a negative litigation effect on innovation incentives by increasing litigation threat for future innovators and a positive competition effect by limiting profit eroding imitation by competitive firms without innovation capacity. Patents are characterized by their strength and length and the optimal innovation-maximizing patent policy balances these two opposing effects. The short-run innovation incentives are a function of the remaining life of the outstanding patent. For moderate patent strength, longer remaining lifetime increases innovation incentives due to the competition effect. The opposite is true for strong patents, for which the litigation effect dominates. The long-run policy that maximizes the rate of innovation calls for moderate-strength and infinite patent length when innovators discount future profits significantly and for strong and finite length when innovators care more about their future profits.