Sequential Innovation and Optimal Patent Design

We study optimal patent design with sequential innovation. Firms innovate by undertaking “research” activities to generate new ideas and by undertaking “development” activities to transform these ideas into viable products. We characterize optimal patent policy, in particular, the tradeoff between patent length and breadth in this setting. We identify a “replacement effect” from the social planner’s perspective: for given reward size, a better patent that generates higher social surplus is shorter but broader. The optimal patent breadth is independent of whether the current patent is expired or not. The optimal patent length may be finite. ∗We thank Matthew Mitchell and Atle Seierstad for helpful comments, and Joaquin Poblete and Konstantinos Serfes for discussing the paper. Riis: Department of Economics, Norwegian Business School, Oslo, Norway; Email: [email protected]. Shi: Department of Economics, University of Toronto, 150 St. George Street, Toronto, ON M5S 3G7, Canada; Email: [email protected].