What is the optimal system of intellectual property rights to encourage innovation? In the most basic theoretical models, patents pose a tradeoff between the social benefits from stronger incentives for invention and losses in consumer welfare as a result of monopoly pricing (Nordhaus 1969). But providing stronger patents for early generations of inventors may also weaken incentives to invest in research and development for later generations (for example, Scotchmer 1991 in this journal), so that the overall effects of stronger patents on innovation are difficult to predict. Negative incentive effects are particularly severe if the boundaries of intellectual property are poorly defined, so that later genera- tions of inventors place themselves at risk of ruinous litigation. Litigation risks are exacerbated when incumbents build "thickets" of strategic patents that cover little innovative progress and instead serve as a legal weapon to protect incumbents' profits (Shapiro 2001; Hall and Ziedonis 2001). Recent patent wars over smart phones and tablet computers have moved these issues to the forefront of policy debates, but the underlying tensions are substantially more general. Empirical analyses that exploit a wealth of historical dataseis and exogenous variation, when done carefully, can help to improve our understanding of these tensions and inform contemporary patent policy.
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