Optimal Patent Breadth for OLG Economy

Existing literature on optimal patent policy and growth has been focused on the infinite horizon economy models. The lack of analogous analysis for an economy of finitelyliving consumers motivates the present study. We develop a simple quality ladder model of an overlapping-generations economy in the spirit of the canonical model by Grossman and Helpman (1991). Then we analyze the effect of changes in innovators’ marker power through changes in patent breadth protection on the stationary R&D investment and welfare. We find that these are determined by the inter-temporal elasticity of substitution (IES). Namely, we find that for plausible values of IES – that is lower than one – weakening innovators market power by narrowing lagging breadth protection, counter – intuitively, has positive effect on R&D investment, but not necessarily on welfare. This crucial role of the IES in patent-policy evaluation is unique to the OLG framework, whereas in the analogous infinite horizon model it has no relevance for the steady state performance. J.E.L classification: L16, O31, O34