Optimal Combination of Patent Instruments in a Cumulative-Innovation Growth Model

Thu, 01 Jan 2026 00:00:00 +0000

This paper develops a tractable general equilibrium model of endogenous growth driven by cumulative innovation, and uses it to characterize optimal patent policy — both for patent breadth (via a “non-infringing inventive step” requirement) and patent length — with a focus on their welfare implications and optimal combination.

The central motivation is that cumulative innovation creates positive knowledge spillovers: each new idea strictly builds on the best existing technology, and the disclosure that patenting requires diffuses knowledge to future innovators. Because private firms do not internalize these spillovers, the decentralized equilibrium features strictly lower R&D investment than the social optimum. The key wedge is an intertemporal spillover effect: firms discount future profits at a rate that includes the hazard of being superseded (rho + lambdavL), while the social planner uses only the pure time preference rate (rho). Appropriability and business-stealing externalities exactly offset each other, so the intertemporal spillover is the sole source of under-investment.

Davin Chor | Macro Paper Warehouse

Optimal Combination of Patent Instruments in a Cumulative-Innovation Growth Model