R&D and the Patent Premium

We analyze the effect of patenting on R&D with a model linking a firm’s R&D effort with its decision to patent, recognizing that R&D and patenting affect one another and are both driven by many of the same factors. Using survey data for the U.S. manufacturing sector, we estimate the increment to the value of an innovation realized by patenting it, and then analyze the effect on R&D of changing that premium. Although patent protection is found to provide a positive premium on average in only a few industries, our results also imply that the premium varies across industries and with firm size. Patent protection also stimulates R&D across all manufacturing industries, albeit with the magnitude of that effect varying substantially, both across industries and with firm size. (JEL O31, O32, O34)