Patents as an Incentive System

Abstract

The modem justification for granting patents is that patents give firms an incentive to invest in research and development (R&D). It therefore seems important to understand how patent law performs as an incentive system, and how it could be improved. Perhaps the most convincing investigation into the effectiveness of patent law would be an empirical one. However, an empirical investigation seems unpromising, since patent systems in different countries are not substantially different, and, in any case, important inventions are patented worldwide so that the incentives for R&D do not depend on where a firm is domiciled. In this chapter I will undertake the more limited task of trying to expose conceptually some shortcomings of patent law as an incentive system.

I thank Eddie Dekel, Joseph Farrell, John Geanakoplos, Ben Hermalin and Jacques Thisse for helpful discussion and comments.