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Patent Races with Secrecy


  • I would like to thank Nadav Levy, Michael Jerison, anonymous referees, and seminar participants at University at Albany and Seoul National University for helpful comments and suggestions. I also thank the Editor for very detailed and helpful suggestions to improve the paper. All remaining errors are mine.


Firms do not always patent their innovations. Instead, they often rely on secrecy to appropriate the returns of innovations. This paper endogenizes firms’ patent propensity, and shows that when the equilibrium patent propensity is small, strengthening patent protection can decrease firms’ incentive to innovate. Paradoxically, this result holds precisely when a stronger patent policy induces more patent applications. Also, these results can arise even in the simplest patent race model with independent innovations as well as with complementary innovations.