Distance Puzzle in Knowledge Spillovers: A Revisit from the Legal Perspective

Abstract

Recent studies found that the localization effect of knowledge spillovers has strengthened during the past few decades, a surprising trend amid the age of digitalization. In this paper, we develop an analytic model to understand this phenomenon from a legal perspective. Our model shows that potential litigations and licenses impose a legal cost on follow-on innovators. The strength of patent protection thus shapes the pattern of knowledge spillovers such that a stronger protection leads to more localized spillovers. We test the model predictions exploiting the introduction of the Court of Appeals for the Federal Circuit (CAFC) in 1982, a remarkable pro-patent shift in the US. Using a matched sample of approximately 2.6 million actual and control citations around the shift, we find that knowledge spillovers became more localized after the creation of the CAFC and this change in the localization effect was more pronounced for judicial areas that were less friendly to patent owners in pre-CAFC litigations, compatible with model predictions. Our study contributes to the literature on knowledge spillovers by introducing a novel legal perspective and offers important policy implications.