Creative Destruction and Optimal Patent Life in a Variety‐Expanding Growth Model

Abstract

This article presents more channels through which the optimal patent life is determined in a R&D‐based endogenous growth model with an expanding variety of consumer goods. It features an endogenous hazard rate at which patented firms' monopoly profits are “creatively destructed” by arrivals of newer varieties, among other things. A patent's effective life is, therefore, endogenized and less than its legal life. This model is calibrated to a global economy with a set of baseline parameter values. The optimal patent length is computed with the algorithm of Golden Search Section, ranging from 17 to 19 years. With the creative‐destruction hazard, the world needs a longer patent term to maximize social welfare but with the prevalence of research congestion, the world needs a shorter patent term. However, if the world's aggregate welfare appreciates varieties of goods in a way strong enough, the optimal patent term can surprisingly extend beyond 1000 years!