Secrecy, the patent puzzle and endogenous growth

• Published in: European economic review Vol. 126; p. 103445
• Main Author: Klein, Michael A.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.07.2020
• Subjects: Endogenous growth; Innovation; Intellectual property rights; O34; Innovation; Intellectual property rights; O31; Endogenous growth; O43
• ISSN: 0014-2921; 1873-572X
• DOI: 10.1016/j.euroecorev.2020.103445

Endogenous growth models typically assume that innovations are protected solely by patents. Consequently, they predict that strengthening patent protection stimulates innovation by increasing the private return to R&D. This contrasts with empirical evidence that: (1) firms routinely employ a combination of patents and secrecy and (2) stronger patent regimes have been associated with increased patenting but not increased innovation, a finding referred to as the “patent puzzle.” In this paper, I develop a novel model of endogenous growth that is consistent with this evidence. Successful innovators’ choose an appropriation strategy in the form of a patent, secrecy mix. Both protection methods are imperfect, and innovators face a trade-off between secrecy’s superior protection against imitation and patenting’s protection against rival innovation. I demonstrate that growth oriented policy changes generate important economic effects through their impact on the endogenous appropriation strategies of innovators.