Trade, Innovation and Optimal Patent Protection

Abstract:

This paper studies optimal patent policy in open economies. We develop a quantitative model of patenting that integrates Helpman-Krugman and Eaton-Kortum trade with Romerian growth. The theory captures the trade-off between the innovation and market power effects of patent protection. We calibrate the model to estimate patent protection by destination and the geography of innovation. Counterfactual analysis shows that stronger patent protection has global benefits but local costs, resulting in inefficiently weak protection. There are large potential gains from global cooperation, but realizing these gains requires more innovative economies to offer stronger protection. By pushing towards policy harmonization the TRIPS agreement reduces global welfare, with developing countries bearing the costs.