New Research: Where do the Rents from Patents Go?

New Research: Where do the Rents from Patents Go?

“Cui bono?”  is a Latin phrase that translates most closely to “who benefits?” Usually brought up in the context of a criminal proceeding, we can also ask cui bono? in the context of economic rents. If a firm receives a patent (read: monopoly rights), to whom do the rents go? A new paper examines the distribution of “rent sharing” among firms receiving patent protection:

This paper analyzes how patent-induced shocks to labor productivity propagate into worker compensation using a new linkage of US patent applications to US business and worker tax records. We infer the causal effects of patent allowances by comparing firms whose patent applications were initially allowed to those whose patent applications were initially rejected. To identify patents that are ex-ante valuable, we extrapolate the excess stock return estimates of Kogan et al. (2017) to the full set of accepted and rejected patent applications based on predetermined firm and patent application characteristics. An initial allowance of an ex-ante valuable patent generates substantial increases in firm productivity and worker compensation. By contrast, initial allowances of lower ex-ante value patents yield no detectable effects on firm outcomes. Patent allowances lead firms to increase employment, but entry wages and workforce composition are insensitive to patent decisions. On average, workers capture roughly 30 cents of every dollar of patent-induced surplus in higher earnings. This share is roughly twice as high among workers present since the year of application. These earnings effects are concentrated among men and workers in the top half of the earnings distribution, and are paired with corresponding improvements in worker retention among these groups. We interpret these earnings responses as reflecting the capture of economic rents by senior workers, who are most costly for innovative firms to replace.

There are two ways to examine the findings presented in the paper: first by comparing workers in general to shareholders, and then by comparing some workers to other workers in the firm.

Workers capture roughly 30% of the surplus from patenting, with shareholders receiving the remaining 70%.

So shareholders and non-W2 employees are capturing the majority of the rents from patenting. But to the extent patent rents translate into higher earnings for workers, which workers receive the benefits?

“Earnings impacts are heavily concentrated among employees in the top quartile of the within-firm earnings distribution and among employees listed on the firm tax returns as ‘firm officers,’” find the authors. Workers who have been with the firm longer and are harder to replace (“firm-stayers”) capture 61% of the gains, but excluding inventors from this estimate leads to an estimated 48% capture for stayers.

When comparing inventors to non-inventors in the firm, the paper found a $15,000 per year earnings increase gap for inventors relative to non-inventors.

The authors also found a disparity between male vs. female employee raises, with men capturing more of the rents than women.

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By |2018-12-07T12:11:52-08:00December 4th, 2018|Blog, Intellectual Property|