Intellectual Property Rights and the Knowledge Spillover Theory of Entrepreneurship

Zoltan AcsGeorge Mason University

Max Planck Institute of EconomicsFairfax (VI)

Mark SandersUtrecht School of Economics

Max Planck Institute of Economicsm.w.j.l.sanders@uu.nl

EEA-ESEM Conference27 August 2009Barcelona

MotivationSchumpeter and Modern Endogenous Growth Theory:

The Entrepreneur and the InventorOpportunities and IdeasInnovation and InventionWho gets the rents of innovation?

But does it really matter in the end?

Intellectual Property Rights Protection:Patents and the Bargain over RentsProviding Incentives for Knowledge CreationHurting Incentives for Knowledge CommercializationOutcomes

Outline

Patents and the US Patent Reform:HistoricalThe Rationale for Patent ProtectionThe Debate on Optimal Patent Protection

Modern Endogenous Growth Theory:The Basic Model StructureResults on Patent Protection Policy

Entrepreneurship, Knowledge Spillovers and Growth:

Our Model and ContributionOur Results on Patent Protection Policy

PatentsHistorical:

Royal Favor and RevenueInventions and InnovationsKnowledge and Ideas Recent US reforms

Federal Appeals CourtFinance PTO out of Fees on Patents Granted

The Rationale:Knowledge creation is source of growth…… and patents reward knowledge creation……so patent protection stimulates growth.

The Debate (e.g J&L (2004) vs K&E (2003)):Is stronger protection always better?Static loss versus dynamic gains

Incentives and dynamic loss

Growth and IdeasBasic Structure: Consumers

1. Willing to save2. Demand for innovations

Basic Structure: Producers1. Make profit (imperfect competition)

2. Demand production factors

Growth and IdeasBasic Structure: Inventors/Innovators

1. Make zero-profit (free entry)2. Need to demand R&D factors

dttiπeTVTVT

ttrnq ),()()( )(

Auction off ideas at willingness to pay:

),(

),(

&

&

DR

DR

Lqfq

Lnfn

Produce ideas according to:

Growth and IdeasBasic Structure:

1. Growth is positive for positive R&D2. Sub-optimal in case of spillovers

Intra-temporal knowledge spilloversInter-temporal knowledge spilloversPositive steady state growth requires:

latent demand for innovationimperfect competition appropriation of rents by new knowledge creatorsincreasing returns to scale in aggregate production

Optimal growth requires: stimulation of knowledge creationpatent protection to internalize positive spillovers

Our Model (Acs and Sanders 2009)

Producers of final good C

Consumers of final good C

Producers of n intermediate

goods

Capital Market

Labor Market

Our Model (Acs and Sanders 2009)

tttt

tτ

tτρ

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:..

)log(:max )(

ρrCC tt /

Consumers (standard)

Our Model (Acs and Sanders 2009)

Final Goods Producers

w

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Our Model (Acs and Sanders 2009)

Final Goods Producers (R&D)

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)Π)Π/Π((

Our Model (Acs and Sanders 2009)

Intermediate Goods Producers

)()()()(:max)(

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βαβα

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)()(

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)(n

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)1)(()(

Our Model (Acs and Sanders 2009)

Intermediate Goods Producers (Entry)

dttntX

eβαβαdttiπeTVT

rt

T

rtE )(

)()1)((),()(

Eδδ LnAφn 1

€

˜ w R =(α + β )(1−α − β )(1−ξ ˙ A / A)

r + ˙ n /n − ˙ X / XφAδ n−δ X

Entry-Arbitrage:

Our Model (Acs and Sanders 2009)

Equilibrium in educated labor market:

€

wR = w R = ˜ w R

Our Model (Acs and Sanders 2009)

Equilibrium

A/n

1

A/n*

AAnn //0

0// AAnn

ww~

Our Model (Acs and Sanders 2009)

Equilibrium Steady State:

)/( nnfnA

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R

nA

ψφ

LL

βαβα

nn

ρrww

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;*

Our Model (Acs and Sanders 2009)

New Features:Captures spin-out/offCaptures upstream spillovers (specialization)

Captures downstream spillovers (opportunities) Residual rents reward commercializationTransfer of rents from innovators to inventors

Results in line with new growth theory:Growth Sub-OptimalCase for R&D and Entrepreneurs subsidyR&D more than EntrepreneursMore patent protection means more R&D…

Results in contrast to new growth theory:…but also less commercialization.Too much protection leads to lower innovation Distinguishing entrepreneurs makes a difference

Our ContributionsIn the tradition of Schumpeter we:…separate commercialization and invention,…allocate the residual rents to the entrepreneur,…assume opportunity to be a spillover.

In the tradition of Romer we:…see patents as (imperfect) claims to rents,…that incentivize knowledge creation.

And we show that:…patents are not needed to incentivize all R&D and……may reduce incentives to commercialize……so patent protection may overshoot its target……as Jaffe and Lerner (2004) argue it has in the US.A better policy would support R&D and entrepreneurs……by clearing the knowledge filters between them.