Patent Protection, Innovation and Technology Licensing

We show that the common wisdom suggesting higher investment in innovation under a stronger patent protection may not be true if the innovator can license its technology ex‐post innovation. If the initial cost of production is high and the slope of the marginal cost of undertaking innovation is moderate, investment in innovation is maximised at a patent protection that is weaker than the strongest patent protection. Otherwise, strongest patent protection maximises investment in innovation. We also show that welfare is maximised neither at the strongest patent protection nor at the weakest patent protection but at an intermediate patent protection. Our results are important for patent policies