Patent Policy, Imitation Incentives, and the Rate of Cumulative Innovation

We study an infinite-horizon cumulative innovation model, in which patents are characterized bytheir length and the likelihood of being ruled valid in a patent infringement litigation. Strengtheningpatent protection via a greater validity or length has two opposing effects on innovation: 1) anegative litigation effect due to increasing the litigation threat for future innovators; and 2) a positivecompetition effect due to reducing profit-eroding imitation by competitive firms without innovationcapacity. The optimal innovation-maximizing patent policy balances these two opposing effects. Formoderate patent validity, longer remaining lifetime increases innovation due to the competition effect. The opposite is true for higher validity, for which the litigation effect dominates. Moderate validity and infinite patent length maximizes innovation when future profits are subject to greater discounting and R&D costs are low, while strong validity and finite length stimulates more innovation under lower discounting and higher R&D costs