On Knowledge Diffusion, Patents Lifetime and Innovation Based Endogenous Growth

Abstract

This paper analyzes the macroeconomic effects of the patents system within the framework of an endogenous growth model with new products development. We assume that patents not only represent a commercial protection for innovators but also entail a partial property right on information. Therefore, increasing the patents lifetime increases the profitability of a given research and development project but also decreases the knowledge spillovers that play a crucial role in the growth process. We then show that when the instantaneous diffusion of knowledge is “low”, growth is maximized by a finite patents lifetime while this role is devoted to infinitely lived patents are growth-maximizing when the instantaneous diffusion of knowledge is “high”. Furthermore, in the former case, the optimal patents lifetime is also finite and shorter than the growth maximizing one. The design of an optimal patents policy only holds in a second best analysis. When the resource allocation is determined by a central planner maximizing the utility of a representative agent, social welfare is always higher than in the decentralized case.