The Escape-Infringement Effect of Blocking Patents on Innovation and Economic Growth

Abstract

This study develops a Schumpeterian growth model to analyze the effects of different patent instruments on innovation. We first analyze patent breadth that captures the traditional positive effect of patent rights on innovation. Then, we consider a profit-division rule between entrants and incumbents. Given the division of profit, increasing the share of profit assigned to incumbents reduces entrants' incentives for innovation. This aspect of blocking patents captures the recently proposed negative effect of patent rights on innovation. Finally, blocking patents generate a non-monotonic effect on innovation when the step size of innovation is endogenous due to a novel escape-infringement effect. Calibrating the model to aggregate data, we find that a marginal increase in the blocking effect of patent protection is likely to raise economic growth