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PATENTS AND GROWTH IN OLG ECONOMY WITH PHYSICAL CAPITAL

Published online by Cambridge University Press:  24 July 2019

Bharat Diwakar ,
Gilad Sorek  and
Michael Stern
Bharat Diwakar
Affiliation:
The Indian Institution of Technology
Gilad Sorek*
Affiliation:
Auburn University
Michael Stern
Affiliation:
Auburn University
*
Address correspondence to: Gilad Sorek, 106A Miller Hall, Department of Economics, Auburn University, Auburn, Alabama, 36849, USA. email: [email protected]. Phone: 716-867-9497.
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Abstract

We study the implications of patents in an overlapping generations model with horizontal innovation of differentiated physical capital. We show that within this demographic structure of finitely lived agents, weakening patent protection generates two contradicting effects on innovation and growth. Weakening patent protection lowers the (average) price of patented machines, thereby increasing machine utilization, output, aggregate saving, and investment. However, a higher demand for machines shifts investment away from the R&D activity aimed at inventing new machine varieties toward the formation of physical capital. The growth-maximizing level of patent protection is incomplete. Shortening patent length is more effective than loosening patent breadth in spurring growth, due to an additional positive effect on growth, that is decreasing investment in old patents. Welfare can be improved by weakening patent protection beyond the growth-maximizing level.

Keywords

PatentsPhysical CapitalGrowthOLG
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 2 , March 2021 , pp. 489 - 508
Copyright
© Cambridge University Press 2019

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Footnotes

This work integrates, corrects, and extends the analyses presented by Diwakar and Sorek in earlier working papers titled “Finite Lifetimes, Patents’ Length and Breadth, and Growth” and “Dynamics of Human Capital Accumulation, IPR Policy, and Growth” (circulated as Auburn University Department of Economics Working Papers: AU-WP #2016-11 and #2016-7, respectively). We are grateful to a referee of this Journal for various helpful comment and suggestions. We have also benefitted from comments by seminar participant at Auburn University, the 2016 and 2017 Southern Economic Association conferences in Washington DC and Tampa FL, and the 2017 North American Econometric Society Summer Meeting in St. Louis MO

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