PATENT POLICY, R&D AND ECONOMIC GROWTH by Chi Ho Angus Chu A dissertation submitted ...

155 Pages·2007·1.17 MB·English

PATENT POLICY, R&D AND ECONOMIC GROWTH

by

Chi Ho Angus Chu

A dissertation submitted in partial fulfillment
of the requirements for the degree of
Doctor of Philosophy
(Economics)
in The University of Michigan
2008

Doctoral Committee:

Associate Professor Dmitriy L. Stolyarov, Chair
Professor John P. Laitner
Assistant Professor Christopher L. House
Assistant Professor Rosemarie H. Ziedonis
© Chi Ho Angus Chu 2008
DEDICATION

In memory of mom and grandma

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ACKNOWLEDGMENTS

I am especially thankful and truly indebted to Dmitriy Stolyarov for his guidance and
patience. I am grateful to Rudi Bachmann, Chris House, John Laitner, Linda Tesar and Rosemarie
Ziedonis for invaluable advice and insightful comments and to Bob Barsky, Juin-Jen Chang,
Benjamin Chiao, Oli Coibion, Kathryn Dominquez, Yuriy Gorodnichenko, Osborne Jackson, Isao
Kamata, Owen Kearney, Miles Kimball, John Leahy, David Levine, Chang-Ching Lin, Stephan
Lindner, Zoe Mclaren, Ryan Michaels, Matthew Shapiro, Doug Smith, Susan Yang, Jing Zhang
and seminar participants at the University of Michigan, Academia Sinica and the Canadian
Economics Association 2007 Conference for very helpful suggestions.

For the chapter “Special Interest Politics and Intellectual Property Rights” that has been
accepted for publication at Economics & Politics, I am grateful to Devashish Mitra (the Editor)
and the anonymous referee for insightful and detailed comments that have greatly improved the
manuscript, and to Robert Barro for his generous advice to me regarding journal submission.
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TABLE OF CONTENTS

DEDICATION ii
ACKNOWLEDGMENTS iii
LIST OF APPENDICES v
LIST OF ABBREVIATIONS vi

CHAPTER
I. Introduction 1
II. Quantifying the Effects of Blocking Patents on R&D 3
III. Quantifying the Effects of Patent Length on R&D 38
IV. Special Interest Politics and Intellectual Property Rights 63
V. Conclusion 94

APPENDICES 95
BIBLIOGRAPHY 142

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LIST OF APPENDICES

Appendix
A. Proofs for Chapter II 96
B. Transition Dynamics for Chapter II 104
C. The Social Rate of Return to R&D for Chapter II 107
D. Tables and Figures for Chapter II 108
E. Proofs for Chapter III 123
F. The Social Rate of Return to R&D for Chapter III 130
G. Tables and Figures for Chapter III 131
H. Proofs for Chapter IV 134
I. Tables and Figures for Chapter IV 140

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LIST OF ABBREVIATIONS

DGE Dynamic General Equilibrium
FDA Food and Drug Administration
GDP Gross Domestic Product
NIHCM National Institute for Health Care Management
PAC Political Action Committee
PhRMA Pharmaceutical Research and Manufacturers of America
R&D Research & Development
SIC Standard Industrial Classification
SIG Special Interest Group
TFP Total Factor Productivity
TRIPS Trade-Related Aspects of Intellectual Property Rights
US United States
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CHAPTER I
Introduction

The literature on R&D-driven economic growth suggests that technological innovations
result from entrepreneurial activities such as R&D investments. In the next two chapters of this
dissertation, I develop tractable frameworks to characterize and quantitatively evaluate the effects
of patent policy on R&D and economic growth. As Acemoglu (p. 1112, 2007) writes,
“… we lack a framework similar to that used for the analysis of the effects of
capital and labor income taxes and indirect taxes in public finance, which we
could use to analyze the effects… of intellectual property right polices… on
innovation and economic growth.”

In Chapter IV, I analyze the political economy of patent policy.

What are the effects of blocking patents on R&D and consumption? To answer this
question, in Chapter II, I develop a generalized quality-ladder growth model with overlapping
intellectual property rights to quantify the inefficiency in the patent system. The analysis focuses
on two policy variables: (a) patent breadth that determines the total profit received by a patent
pool; and (b) the profit-sharing rule that determines the distribution of surplus between
innovators. To quantify the inefficiency arising from blocking patents that are generated by these
two policy variables, the model is calibrated to aggregate data of the US economy. Under
parameter values that match key features of the US economy and show equilibrium R&D
underinvestment, I find that eliminating blocking patents would lead to a conservatively
estimated increase in R&D of 12% and long-run consumption of 4% per year. I also quantify the
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transition-dynamic effects of patent policy and show implications that are different from previous
studies in important ways.

Is the patent length an effective policy instrument in stimulating R&D? To answer this
question, in Chapter III, I develop a generalized variety-expanding growth model and calibrate
the model to aggregate data of the US economy to quantify the effects of patent extension. At the
empirical patent-value depreciation rates, extending the patent length beyond 20 years leads to a
negligible increase in R&D despite equilibrium R&D underinvestment. On the other hand,
shortening the patent length can lead to a significant reduction in R&D and consumption. The
calibration exercise also suggests that about 35% to 45% of the long-run TFP growth in the US is
driven by R&D. Finally, I identify and analytically derive a dynamic distortion of patent policy
on saving and investment in physical capital that has been neglected by previous studies, which
consequently underestimate the distortionary effects of patent protection.

What are the welfare implications of pharmaceutical lobbying? Since the 80’s, the
pharmaceutical industry has benefited substantially from the strengthening of patent protection
for brand-name drugs as a result of the industry’s political influence. To analyze this
phenomenon, in Chapter IV, I incorporate special interest politics into a quality-ladder growth
model to consider the policymakers’ tradeoff between the socially optimal patent length and
campaign contributions. The welfare analysis suggests that the presence of a pharmaceutical
lobby distorting patent protection is socially undesirable in a closed-economy setting but may
improve global welfare in a multi-country setting, which features an additional efficiency tradeoff
between monopolistic distortion and international free-riding on innovations. Finally, if the SIGs
have asymmetric influences across countries, then the country, in which the government places a
higher value on campaign contributions, would gain by less or even suffer a welfare loss.
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CHAPTER II
Quantifying the Effects of Blocking Patents on R&D

“Today, most basic and applied researchers are effectively standing on top of a
huge pyramid… Of course, a pyramid can rise to far greater heights than could
any one person... But what happens if, in order to scale the pyramid and place a
new block on the top, a researcher must gain the permission of each person who
previously placed a block in the pyramid, perhaps paying a royalty or tax to gain
such permission? Would this system of intellectual property rights slow down the
construction of the pyramid or limit its heights? … To complete the analogy,
blocking patents play the role of the pyramid’s building blocks.” – Carl Shapiro
(2001)

1. Introduction
What are the effects of blocking patents on R&D? In an environment with cumulative
innovations, the scope of a patent (i.e. patent breadth) determines the level of patent protection for
an invention against imitation and subsequent innovations. This latter form of patent protection,
which is known as leading breadth in the literature, gives the patentholders property rights over
future inventions, and the resulting overlapping intellectual property rights may dampen the
incentives for R&D. This phenomenon is referred to as blocking patents.

The main contribution of this chapter is to develop an R&D-driven endogenous growth
model to quantify this inefficiency in the patent system. To the best of my knowledge, this
chapter is the first to perform a quantitative analysis on patent policy by calibrating a DGE model
combining the following features: (a) overlapping intellectual property rights that are emphasized
by the patent-design literature; (b) multiple R&D externalities that are commonly discussed in the
growth literature; and (c) endogenous capital accumulation that leads to a dynamic distortionary
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