State-Dependent Intellectual Property Rights Policy∗

What form of intellectual property rights (IPR) policy contributes to economic growth? Should a company with a large technology lead receive the same IPR protection as a company with a more limited advantage? Should followers be able to license the products of technology leaders? We develop a general equilibrium framework to investigate these questions. The economy consists of many industries and firms engaged in cumulative (step-by-step) innovation. IPR policy regulates whether followers in an industry can copy the technology of the leader, whether they can license their innovations, and what types of patent infringement fees they are expected to pay. With full patent protection, followers can catch up to the leader in their industry only by making the same innovation(s) themselves. We prove the existence of a steady-state equilibrium in a baseline environment and characterize some of its properties. We then quantitatively investigate the implications of different types of IPR policy on the equilibrium growth rate and welfare. The two major results of this exercise are as follows. We find that full patent protection is not optimal (welfare maximizing); instead, optimal policy involves state-dependent IPR protection, providing greater protection to technology leaders that are further ahead than those that are close to their followers. This form of the optimal policy is a result of a form of “trickle-down” effect, which implies that providing greater protection to firms that are further ahead of their followers than a certain threshold increases the R&D incentives also for all technology leaders that are less advanced than this threshold.