Technology diffusion, innovation size, and patent policy

Abstract

We develop a Schumpeterian growth model based on technology diffusion and innovation, whereby the distribution of the innovation size is endogenously determined. Firms improve the targeted products by randomly combining existing technologies owned by other firms. Furthermore, the firms contribute to the adoption of newly developed frontier technology. The innovators must attain the minimum innovation size required for a patent. That is, the patent office grants patents only for superior innovations. We show that an increase in the minimum innovation size may reduce the average patentable innovation size because of an endogenous response of the distribution of innovation size. This implies that even if the patent office requires superior innovations in order to assign patents, innovators tend to produce inferior patentable innovations on average.