When innovation is sequential, the development of new products depends on the
access to previous discoveries. As a consequence the patent system affects both the
revenues and the cost of the innovator. We construct a model of sequential innovation
in which an innovator uses n patented inputs in R&D to invent a new product. We ask
three questions: (i) what is the net effect of patents on innovation as technologies
become more complex (n increases)? (ii) are patent pools welfare enhancing? (iii) what
is the optimal response of patent policy as technological complexity increases? We find
that the answers to these questions depend on the degree of complementarity and
substitutability between the inputs used in research
