Technology market, product market and aggregate innovation

This paper examines the growth maximization mix for intellectual property rights (IPR) in an economy in which incumbents and outside inventors endogenously choose how to develop inventions and commercialization strategies, both of which determine the innovation rate. Outside inventors can choose to commercialize their inventions by (i) launching a new product or (ii) selling to incumbents. I find that if inventors all sell on the technology market, then protecting inventors' patents from imitation by firms raises aggregate innovation. If, instead, all inventors enter the product market, the IPR policy that regulates the ability of incumbents' patents to block the entry of improved products faces a trade-off between innovation from existing firms and inventors, which leads to a single-peaked relationship between economic growth and the blocking strength. When both commercialization strategies are chosen, a balanced IPR policy can raise aggregate innovation by encouraging inventors to choose the more efficient commercialization method.