The Bright and the Dark Sides of Patents: Experimental Evidence (Job Talk)

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Abstract:  Patent protection is one of the most common tools in the western world to encourage innovation by increasing the reward it yields. However, how patents influence search for discoveries and if they indeed increase innovative efforts is far from being clear. To address this question we developed a game that simulates a simplified interaction among R&D investors. The game is played under three conditions: ``Patent", ``No Patent" and ``Singleton", and implemented innovative activity in sequential innovation structure. New novel analysis from game theoretic point of view is presented, and the main experimental results are analysed in the light of theoretical results. The experimental results, as well as the theoretical ones, suggest that patent protection leads players to search less for  sequential innovations, since patent holders do not have competition and thus perform a leisurely search. However, in contrast to the theoretical results, patent protection does not increase the search rate for first discoveries. On the other hand, more discoveries overall are revealed under patent protection. That is, patents force  innovators to search in distinct places, and this coordination allows more efficient search. Thus, while patents were introduced to increase the amount of innovative activity, our results suggest that they actually decrease innovative efforts, and that the benefits of patent protection lie in better coordination, which can likely be obtained in other ways. Finally, players in the Patent condition searched for discoveries more than players in the Singleton condition (despite being economically identical), demonstrating a positive psychological effect of observing others' success on search and innovation.