Patents and quality growth in OLG economy

This paper shows how heterogeneity in patent ownership across generations and lifecycle saving considerations qualitatively change the conventional implications of patent policy for quality growth. We study a close Overlapping Generations economy that grows through sequential quality improvements (“quality-ladder”), to show that for plausible values of the Inter-temporal Elasticity of Substitution (a) shorter patent length enhances growth (b) under exogenous innovation size loosening patent breadth protection spurs R&D investment and quality growth and (c) the effect of loosening lagging breadth protection on R&D investment and quality growth under endogenous innovation size depends on patents length. Our findings explore a new channel through which strong patents may hinder innovation and emphasize the importance of coordination in patent-policy across the different dimensions of the patents system.