Patent Theory versus Patent Law

According to the economic theory of patents, patents are needed so that pioneer firm have time to recoup their sunk costs of research and development. The key element in the economic theory is that pioneer firms have large, hard to recoup, sunk costs. Yet patents are not awarded on the basis of a firm’s sunk costs. Patent law, in fact, ignores costs. The disconnect between patent law and patent theory suggests either that modifying patent law so that it better fits with patent theory would reduce the costs and inefficiencies associated with current patent practice or that the standard economic theory of patents is wrong.