Ideas-Driven Endogenous Growth and Standard-Essential Patents

In this paper, we study the impact of standard-essential status for patents on production possibilities of the economy and long-term growth. As we show, the innovators’ risk of losing the standard-setting game ex-ante attenuates the anticipation of a larger market share. Moreover, when the discovery rate of new technologies is smaller than the discounting rate of the monopoly profits, standards and standard- essential patents tend to be growth-reducing, despite a conjectured positive contribution of standards to the marginal productivity of human capital. Market failures associated with patent abuse have been treated historically by various measures ranging from compulsory licensing to imposing reasonable and non-discriminatory (FRAND) pricing on essential technologies. We show that mandated compulsory licensing has a negative impact on long-term growth, while a voluntary FRAND pricing together with faster rates of follow-up innovations may be growth-enhancing.