Dynamic effects of patent policy on innovation and inequality in a Schumpeterian economy

Abstract

This study explores the dynamic e¤ects of patent policy on innovation and income inequality in a Schumpeterian growth model with endogenous market structure and heterogeneous households. We …nd that strengthening patent protection has a positive e¤ect on economic growth and a positive or an inverted-U e¤ect on income inequality when the number of di¤erentiated products is …xed in the short run. However, when the number of products adjusts endogenously, the e¤ects of patent protection on growth and inequality become negative in the long run. We also calibrate the model to US data to perform a quantitative analysis and …nd that the long-run negative e¤ect of patent policy on inequality is much larger than its short-run positive e¤ect. This result remains consistent with our empirical …nding from a panel vector autoregression.

Patent policy and economic growth: A survey

“…Both of these studies find positive effects of patent breadth on income inequality. However, a recent study by Chu et al (2021) shows that although patent breadth increases income inequality in the short run when the number of differentiated products N is fixed, a larger reduces income inequality in the long run when N becomes endogenous.…”

“…A larger patent breadth attracts the entry of new products and increases the number of differentiated products , which in turn exerts a negative dilution effect on the arrival rate of innovation in (21) and the interest rate . Chu et al (2021) show that the negative effect of patent breadth on income inequality prevails in the long run in the Schumpeterian growth model with both quality improvement and new product development in Peretto (2007). They also provide empirical evidence to support this theoretical result.…”

“…Given the assumption of homothetic preferences in Chu et al (2021), the aggregate economy continues to be independent of the income distribution. Kiedaisch (2021) extends the R&D‐based growth model in Foellmi and Zweimuller (2006), in which the income distribution affects the aggregate economy due to non‐homothetic preferences of heterogeneous households, to explore the effects of patent protection (taking into account its effects via the income distribution) on economic growth.…”

“…Adams (2008) is a notable example and finds that stronger patent rights tend to increase income inequality. Adams (2008) considers static panel regressions, whereas Chu et al (2021) use a panel VAR to examine the dynamic effects of stronger patent rights on income inequality. They find that stronger patent rights increase income inequality in the short run but decrease inequality in the long run.…”

Inflation, innovation, and growth: A survey

“…In contrast, under the CIA constraint on consumption, an increase in in ‡ation decreases unemployment by depressing labor supply and also sti ‡es innovation. To see the di¤erence between the two CIA constraints, we rewrite the resource constraint on labor as l t = l x;t + l r;t + u t , 12 where u t denotes unemployment which is positive due to search frictions. Suppose we denote l s t l t as labor supply and l d t l x;t + l r;t as labor demand.…”