Imperfect Patent Protection and Innovation

The paper studies the effect of strengthening protection on R&D incentives in the context of process innovation. It shows that for non‐drastic innovations, that do not render the pre‐existing technology obsolete, the innovator might favor imitation if the expected royalty rate determined by the court is sufficiently high. Since imitation is discouraged for very high levels of patent protection, R&D investment is maximized for an intermediate level of patent strength. This finding provides a theoretical explanation for emerging empirical evidence questioning the effectiveness of strengthening protection on innovation incentives. It also serves as a justification for the imperfections of the existing patent system that allows for some infringement.