Incentives and Dynamics of Innovation

forthcoming

Innovation is the key driver of competitiveness and growth. It supplants existing technologies and erodes the market position of firms. This creative destruction lies at the heart of endogenous growth models. This proposal studies how patent rights shape innovation incentives and the micro-dynamics of technological competition in Europe and the U.S. Patent rights are a key policy instrument to enhance incentives, and it is critically important that patent-granting agencies function effectively. These incentives influence the dynamics of technological competition, and the extent to which small firms compete effectively with large firms. This proposal exploits patents as a window onto the dynamics of technological competition. Creative destruction operates through innovation and patents reflect the dynamics at this level. Patents are more informative when granting agencies effectively screen to ensure that inventions meet an appropriate patentability standard. Thus, screening is integrally linked to the broader study of innovation competition and creative destruction. This proposal fills critical gaps in the literature, using frontier methodological and empirical tools, and contributes to evidence-based policymaking in science and technology. There are four thematically linked research strands, all of which break new ground. The first strand develops an economic model of screening by the European Patent Office, which incorporates its unique institutional features and enables us to quantify its effectiveness. The second empirically analyses key administrative mechanisms in the European and U.S. patent offices designed to correct screening errors. The third develops a methodology to assess whether the patentability standard is set at the efficient level for society. The fourth strand empirically studies the landscape and dynamics of technological competition and measures the impact of creative destruction on the gains from innovation.