Patents and Research Investment: Assessing the Empirical Evidence

A well-developed theoretical literature — dating back at least to Nordhaus (1969) — has analyzed optimal patent policy design. We re-present the core trade-off of the Nordhaus model and highlight an empirical question which emerges from the Nordhaus framework as a key input into optimal patent policy design: namely, what is the elasticity of R&D investment with respect to the patent term? We then review the — surprisingly small — body of empirical evidence that has been developed on this question over the nearly half century since the publication of Nordhaus’s book…
A key parameter needed to inform optimal patent policy design is the elasticity of research investments with respect to the patent term. Estimating this elasticity is conceptually difficult because it requires constructing a counterfactual in which we can infer that some scientifically feasible inventions would have been brought to market under an alternative patent policy design. Despite a near half-century of research effort, we have essentially no credible empirical evidence on this elasticity. Our goal in this paper has been to make the theoretical and empirical literature on this question more accessible in hopes of encouraging the development of novel research approaches to this topic. Given that both theory and casual evidence suggest that this elasticity is likely to vary across different types of technologies, understanding heterogeneity in the relationship between patents and research investments across industries is particularly important looking ahead.

Eric Budish, Benjamin N. Roin, and Heidi L. Williams

American Economic Review

January 2016

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