Experimentation, Patents, and Innovation
This paper studies a simple model of experimentation and innovation. Our analysis suggests that patents may improve the allocation of resources by encouraging rapid experimentation and efficient ex post transfer of knowledge across firms. Each firm receives a private signal on the success probability of one of many potential research projects and decides when and which project to implement. A successful innovation can be copied by other firms. Symmetric equilibria (where actions do not depend on the identity of the firm) always involve delayed and staggered experimentation, whereas the optimal allocation never involves delays and may involve simultaneous rather than staggered experimentation. The social cost of insufficient experimentation can be arbitrarily large. Appropriately-designed patents can implement the socially optimal allocation (in all equilibria). In contrast to patents, subsidies to experimentation, research, or innovation cannot typically achieve this objective. We also show that when signal quality differs across firms, the equilibrium may involve a nonmonotonicity, whereby players with stronger signals may experiment after those with weaker signals. We show that in this more general environment patents again encourage experimentation and reduce delays.
We thank participants at the September 2009 workshop of the Toulouse Network on Information Technology for comments. Acemoglu also gratefully acknowledges financial support from the Toulouse Network on Information Technology. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Daron Acemoglu & Kostas Bimpikis & Asuman Ozdaglar, 2011. "Experimentation, Patents, and Innovation," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 37-77, February. citation courtesy of