The Bright Side of Patents

Motivated by concerns that the patent system is hindering innovation, particularly for small inventors, this study investigates the bright side of patents. We examine whether patents help startups grow and succeed using detailed micro data on all patent applications filed by startups at the U.S. Patent and Trademark Office (USPTO) since 2001 and approved or rejected before 2014. We leverage the fact that patent applications are assigned quasi-randomly to USPTO examiners and instrument for the probability that an application is approved with individual examiners’ historical approval rates. We find that patent approvals help startups create jobs, grow their sales, innovate, and reward their investors. Exogenous delays in the patent examination process significantly reduce firm growth, job creation, and innovation, even when a firm’s patent application is eventually approved. Our results suggest that patents act as a catalyst that sets startups on a growth path by facilitating their access to capital. Proposals for patent reform should consider these benefits of patents alongside their potential costs…
[T]he adverse effects of review delays for startups should help inform reform proposals targeted at accelerating the review process at the patent office. The USPTO has historically faced budgetary constraints that limit its ability to allocate more resources to patent reviews. The constraints force the agency to make choices among various priorities, including speeding up reviews and improving review quality (Hegde 2012). Our findings suggest that the benefits of speeding up reviews can be immediate and substantial, particularly for small inventors whom the patent system is intended to protect.

Joan Farre-Mensa, Deepak Hegde, Alexander Ljungqvist

NBER

February 2016

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