Optimal Patent Life in a Variety-Expansion Growth Model

This paper presents more channels through which the optimal patent life is determined in a R&D-based endogenous growth model that permits growth of new varieties of consumer goods over time. Its modeling features include an endogenous hazard rate facing incumbent monopolists, the prevalence of research congestion, and the aggregate welfare importance of product differentiation. As a result, a patent’s effective life is endogenized and less than its legal life. The model is calibrated to a global economy with a set of baseline parameter values. Under the benchmark patent length of 20 years, the calibrated model can deliver along the balanced growth path a plausible innovation rate of 2.84% per year and an economy-wide markup rate of 1.15. The optimal patent length is computed with the algorithm of Golden Search Section, ranging from 17 to 19 years. With the creative-destruction hazard, the world needs a longer patent term to maximize social welfare, but with the prevalence of research congestion, the world needs a shorter patent term. However, if the world’s aggregate welfare appreciates varieties of goods in a way strong enough, the optimal patent term can surprisingly extend beyond even 1,000 years!