Peanut Butter Patents Versus the New Economy : Does the Increased Rate of Patenting Signal More Invention or Just Lower Standards?

The rate of patenting in the U.S. has exploded in the last half of the 1990s. It is widely believed that the increase in patent grants is at least partly a result of the apparent decline in examination standards. There has been little exploration, however, of the theoretical prediction that a decline in examination standards would itself induce an increase in dubious applications. We estimate a simultaneous equation model, in which the number applications depend on the perceived rigor of the examination process, amongst other things and patent grants depend on the number and quality of applications. We have a multi-dimensional panel, with data on the application and grant rates for each year, countries of origin, and jurisdiction of examination. We find that a 'loosening' of the grants standards by one percent increases applications by 8 percent in the full sample and by 3 percent in the Non-U.S. sample. This result points to the importance of accounting for the endogenous application response particularly for the U.S. case. Controlling for this effect, we find that application elasticity of grants is around 0.124 for the full sample and 0.145 for the Non-U.S. one, and is declining over time in both. In addition countries whose patent applications are more likely to be successful in the U.S. are more likely to be successful in other countries as well. These findings confirm that inventors respond to increased likelihood of success at the patent office by filing more applications, but also confirm earlier findings that the surge in patenting in the U.S. in the last two decades appears to be driven to a significant extent by an increase in the underlying invention rate