Peanut Butter Patents Versus the New Economy: Does the Increased Rate of Patenting Signal More Invention or Just Lower Standards?

Abstract

The rate of patenting in the U.S. has exploded in the last half of the 1990s. It is widely believed that the increase in patent grants is at least partly a result of the apparent decline in examination standards. There has been little exploration, however, of the theoretical prediction that a decline in examination standards would itself induce an increase in dubious applications. We estimate a simultaneous equation model, in which the number applications depend on the perceived rigor of the examination process, amongst other things and patent grants depend on the number and quality of applications. We have a multi-dimensional panel, with data on the application and grant rates for each year, countries of origin, and jurisdiction of examination. We find that a ‘loosening’ of the grants standards by one percent increases applications by 8 percent in the full sample and by 3 percent in the Non-US sample. This result points to the importance of accounting for the endogenous application response specially for the US case. Controlling for this effect, we find that application elasticity of grants is around 0.124 for the full sample and 0.145 for the Non-US one, and is declining over time in both. In addition countries with higher US grant propensities have more grants in Non-US Non-US as well. All the above evidence contradicts the belief that the US patent surge is an artifact of declining US examination standards. We conclude that changes in the underling invention rate are at least partly responsible for US patent explosion.