The Decision to Patent, Cumulative Innovation, and Optimal Policy

Abstract

This paper analyzes optimal policy in the context of cumulative innovation in a model that endogenizes patenting decisions of early innovators. Secrecy can significantly decrease investment in the second innovation. We show that as the effectiveness of secrecy as a protection mechanism increases, which may be the case if the government has a strong trade secret policy or innovators can monitor the flow of their technological information, it becomes optimal to have broad patent protection over a larger parameter space. In cases when patent policy is ineffective in achieving disclosure, it is socially desirable to have a lenient antitrust policy and allow collusive agreements.

Keywords: Cumulative innovation, patenting decision, patent policy, antitrust policy

JEL Classification: O31, O38, L40