Working Paper: NBER ID: w14408
Authors: Daron Acemoglu; Kostas Bimpikis; Asuman Ozdaglar
Abstract: 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.
Keywords: Patents; Innovation; Experimentation
JEL Codes: D83; D92; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| patents (O34) | resource allocation (H61) |
| patents (O34) | experimentation rates (C90) |
| patents (O34) | innovation (O35) |
| patents (O34) | mitigate inefficiencies (D61) |
| signal quality (L15) | experimentation timing (C90) |
| patents (O34) | optimal allocations (D61) |
| subsidies (H20) | innovation outcomes (O36) |