Monday, April 19, 2010

Optimizing patent law design is hard, why not drop it

Patents are supposed to rewards those successful at developing new technologies by granting them a temporary monopoly on their innovation. We know monopolies are bad for social welfare, in this case because it leads to underprovision of the innovation, and thus the length of the monopoly protection needs to be determined according to all sorts of factors. But patent law provides a uniform length for patents. Is this really bad?

From my reading of the latest paper by Angus Chu, yes. While it seems quite obvious that optimal patent length should depend on the level of competition in a sector, or that latter's market size, what really matters is how much patent length differ, and what a uniform patent length implies in terms of welfare losses. Chu performs in this regard an interesting numerical exercise. In a two-sector model, welfare costs of uniform patent length can reach 34% of consumption if the arrival rate of innovation is five times higher in one sector, and both sectors have the same market share. One could reasonably ask whether it is even worth have patent protection, considering all the other problems they generate (1, 2, 3).

1 comment:

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