Less Protection, More Innovation

Abstract

Reward theory, which represents the conventional economic view, suggests that the optimal strength of patents depends on a use-creation tradeoff; the inevitable production of dead-weight losses in the ex post market for the invention for the purpose of fostering technological progress. This paper demonstrates a caveat in this approach by using game theory. Strong patents increase the value of becoming an inventor. As such, more firms are attracted to R&D. However, each firm rationally discounts the probability that it will be the first to obtain a patent, and may therefore reduce or abandon its R&D investment. This leads to a lower invention probability per R&D firm, which in turn may lead to a lower aggregate invention probability. In such cases, weaker patent protections can simultaneously foster innovation and eliminate dead-weight losses in the ex post market for the invention. Hence, contrary to the conventional view, the use-creation tradeoff does not exist globally.