Intellectual Property Rights and the Knowledge Spillover Theory of Entrepreneurship Zoltan Acs George Mason University Max Planck Institute of Economics Fairfax (VI) Mark Sanders Utrecht School of Economics Max Planck Institute of Economics 12 December 2008 Utrecht

Motivation Patents and the US Patent Reform: Patents and the Bargain over Rents Incentives for Knowledge Creation Incentives for Knowledge Commercialization Outcomes Growth and Ideas; the basic model structure Consumers Producers/Intermediates Invention, Innovation and Growth Schumpeter and Endogenous Growth Theory Innovation vs. Invention Who gets rents? Opportunities vs. Ideas The source of vs. the bottleneck in innovation

Growth and Ideas Basic Structure: Consumers 1. Willingness to save (dynamic optimization) 2. Demand for innovations (static optimization) Basic Structure: Producers 1. Make profit (imperfect competition) 2. Demand production factors (perfect competition)

Growth and Ideas Basic Structure: Inventors/Innovators 1. Make zero-profit (free entry) 2. Demand R&D factors 3. Knowledge spillovers free 4. No dynamic optimization Auction off ideas to entrants at willingness to pay: Produce ideas according to first order differential equation(s):

A Model (Acs and Sanders 2009) Producers of final good C Consumers of final good C Producers of n intermediate goods Capital Market Labor Market

A Model (Acs and Sanders 2009) Consumers (standard dynamic optimization) Where μ(t) is the shadow price (in utils) of assets. Intuition: Set marginal utility of consumption today equal to the marginal opportunity cost of consuming today (μ(t)) =discounted marginal utility of consuming 1+r(t) tomorrow.

A Model (Acs and Sanders 2009) Consumers (standard dynamic optimization)

A Model (Acs and Sanders 2009) Consumers (standard dynamic optimization)

A Model (Acs and Sanders 2009) Consumers (standard dynamic optimization)

A Model (Acs and Sanders 2009) Final Goods Producers

A Model (Acs and Sanders 2009) Final Goods Producers (R&D)

A Model (Acs and Sanders 2009) Intermediate Goods Producers

A Model (Acs and Sanders 2009) Intermediate Goods Producers (Entry) Entry-Arbitrage:

A Model (Acs and Sanders 2009) Equilibrium in labor market:

A Model (Acs and Sanders 2009) Equilibrium A/n 1 A/n*

A Model (Acs and Sanders 2009) Equilibrium Steady State:

A Model (Acs and Sanders 2009) New Features: Captures spin-out/off Captures upstream spillovers (specialization) Captures downstream spillovers (opportunities) Residual rents reward commercialization Transfer of rents from innovators to inventors Results in line with new growth theory: Growth Sub-Optimal Case for R&D and Entrepreneurs subsidy R&D more than Entrepreneurs More patent protection means more R&D… Results in contrast to new growth theory: …but also less commercialization. Too much protection leads to lower innovation Distinguishing entrepreneurs makes a difference

A Model (Acs and Sanders 2009) In the tradition of Schumpeter we: …separate commercialization and invention, …allocate the residual rents to the entrepreneur, …assume opportunity to be a spillover. In the tradition of Romer we: …see patents as (imperfect) claims to rents, …that incentivize knowledge creation. But we show that: …patents are not needed to incentivize R&D and… …patent protection may overshoot the target, …as Jaffe and Lerner (2004) argue it has in the US.