Essays on the economics of patent rights [electronic resource]
Keywords: Economics.

This dissertation consists of three essays on the economics of patent rights. The first essay provides empirical evidence on the effect of patent rights on the external financing of innovative firms. The essay relies on detailed data on Finnish government-subsidized R& D projects to help mitigate the problem of confounding the effect of patents with the underlying innovative output. The essay develops an identification strategy that exploits the timing difference between the patenting and financing decisions of interest and utilizes variation in the historical evolution of the firms' projections for the revenue earning potential of their businesses in order to generate variation in patenting across eventually similar projects. An instrumental variables approach finds the effect of patenting to be an order of magnitude higher for both external equity-type financing and VC investor acquisition than ordinary least squares regressions would predict. The baseline IV estimates imply that, for average firms with average projects, going from zero to one patent application per project increases the growth rate of external equity-type capital by 52-53 percentage points and the probability of acquiring a new VC investor by 30 percentage points. Conversely, the IV estimates provide no evidence of a positive effect of patenting on conventional debt financing. The second essay contributes to the theoretical literature on patent rights by demonstrating how the effective length and breadth of patent protection are determined jointly by the standard patent policy parameters, such as the nominal term and scope of patent rights, and the characteristics of the legal process through which the patents can be enforced. With the costly and uncertain nature of the legal process featured in the model, the extent of monopoly power provided by a patent grant becomes a function of the innovator's ability to enforce her patent rights through the legal system. With such heterogeneity in the economy, a patent policy maker faces an additional trade-off between granting excessive market power to some innovators and providing sufficient innovation incentives to others. This trade-off is shown to hurt social welfare and make patents a less attractive innovation policy tool compared to other mechanisms. Finally, the essay shows that efficient technology markets can help mitigate the problem by functioning as an incentive equalizer for innovators with heterogeneous litigation costs. The third essay develops a model of patenting under imperfect legal enforcement to derive theoretical predictions on how the innovators' patenting decisions should respond to changes in their litigation costs depending on the litigation prospects, i.e. the innovator's probability of winning an infringement case, prevailing in the innovator's competitive environment. The model is mapped to innovation-level data on patenting decisions and the empirical analysis investigates whether the relationship between firm size and patenting decisions varies with measures of litigation prospects as predicted by a litigation cost disadvantage of small firms. Assuming that smaller innovators are disadvantaged by higher litigation costs, the model predicts that the disadvantage is larger when the prevailing litigation prospects are weaker, and thus the predicted probability of patenting should increase faster (or decrease slower) with firm size when the litigation prospects are weaker. The empirical findings are consistent with the predictions as they show that the predicted probability of patenting increases faster (or decreases slower) with firm size when the litigation prospects are weaker.