Optimal Patent Design with Uncertainty and Loss-Averse Innovators

Although representing a major engine of economic growth, incremental innovations might not be stimulated enough when patent breadth and patent length are not designed properly. In this paper we model the choice between breakthrough and incremental innovations in the context of a neo-Schumpeterian growth model that accounts for the introduction of new goods and related sunk costs and that assumes uncertainty-averse and loss-averse innovators. Our findings show that innovators' choice in terms of novelty is shaped by patent breadth and length, that affect both the private and the social values of innovation. Accounting for innovators' uncertainty and loss aversion challenges the standard results on optimal patent design.