UC Riverside

This dissertation consists of three essays which explore the impact of simultaneous innovation on growth, macroeconomic fluctuations, and welfare, as well as their implications for the patent system. Chapter one provides an overview. Chapter two analyses the impact of the coordination frictions implicit in the presence of simultaneous innovation on growth and welfare. The coordination failure generates a mass of foregone innovation and reduces the economy-wide research intensity. Both effects decrease the growth rate. Because of this, the frictions also amplify the fraction of wasteful simultaneous innovation. A calibration suggests the impact of coordination frictions on the growth rate and welfare is substantial.

Chapter three studies the impact of simultaneous innovation on macroeconomic fluctuations in a stochastic expanding-variety endogenous growth model. Research projects innovated by many firms simultaneously are of higher quality, on average, and contribute relatively more to the expansion of the knowledge stock in the economy. This delivers an endogenous mechanism that amplifies the volatility of R&D investment by a factor of two. Furthermore, due to this endogenous mechanism, the model produces mildly pro-cyclical R&D --- a well-documented feature of the data. Whereas the existing literature has proposed several mechanisms that explain the positive correlation between investment in R&D and output, the moderate strength of the relationship has remained under-explored.

The conventional viewpoint on the patent system is that it allocates market power in order to stimulate disclosure of information and create incentives for firms to innovate. Chapter four develops a dynamic equilibrium search model to show that, in sharp contrast to this traditional view, the patent system can erode, rather than allocate market power. This result is obtained, regardless of whether or not it provides prior user rights, by incentivizing firms to patent and, at the same time, delivering a sufficiently weak patent protection. The patent system delivers incentives by either punishing firms that choose not to patent or by providing a strategic advantage to firms that patent. Analysis of the welfare properties of the patent system suggests its ability to erode market power may be central to its capability to increase welfare.