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Economics of Industry Paper
Optimal Patent Renewals
Francesca Cornelli and Mark Schankerman
January 1996
Paper No' EI 13:
Full Paper (pdf)

Tags: patents; renewal fees; r&d; welfare gains; productivity; firms.

When firms have different R&D productivities, it may be welfare increasing to differentiate patent lives across inventions. The reason is that the uniform patent life provides excessive incentives to do R&D to the low productivity firms and insufficient incentives to high productivity firms. Such a differentiated scheme is implementable through renewal fees, which endogenously determine an optimal pattern of patent life-spans and show how it depends on key features of the economic environment, such as the degree of heterogeneity in R&D productivity across firms, the ability of patentees to appropriate the potentital rents generated by R&D and the learning process about the value of innovation. The potential welfare gains associated with optimal renewal schemes are illustrated through simulation analysis.