Essays on Innovation

This dissertation consists of two chapters on topics in innovation. The first chapter analyzes how alternative patent enforcement regimes affect inventors in the market. How does a change in enforcement costs influence the inventors\u27 decisions to keep, sell to an intermediary, or enforce their patents through litigation? How much do inventors earn out of patent enforcement and trade under alternative cost structures? I combine publicly available litigation data with data on intermediaries to (i) document the impact of having tougher standards on the preliminary injunction on patent sale prices and incentives, (ii) calibrate a dynamic game, (iii) simulate counter-factual outcomes under different patent enforcement systems to quantify benefits on inventors. Reduced-form analysis of the data shows that small firms operating in high-risk litigation sectors are more likely to sell their patents after the implementation of tougher standards on the preliminary injunction. Moreover, such a change in standards decreases the price that inventors receive from the patent sale. To capture the impact of alternative regimes on inventors, I develop and calibrate a dynamic game played between an inventor, an intermediary and a licensee. In the model, inventors have the option to keep, litigate or sell their assets to an intermediary. An intermediary negotiates a price with inventors and chases licensees, picks the optimal time to enforce, and makes a take-it-or-leave-it offer to the licensee. The key point of this model is the difference between enforcement technologies of inventors and intermediaries in generating returns from enforcement. Intermediaries can settle the cases outside the courtroom and share the surplus with inventors. The quantitative analysis suggests that in equilibrium, the average litigation fees paid increases by 7.46 (no-intermediary world), 2.5 (British Rule), and 3.5 (intermediary-pays-all rule) percent. Additionally, the average earnings of inventors decrease by 15.23 (no-intermediary world), 2 (British Rule), 2.5 (intermediary-pays-all rule) percent. The findings of this chapter can help to inform future policy change on patent enforcement. In the second chapter, which is based on research that I conducted with David S. Abrams, Ufuk Akcigit, I answer the following question: How do non-practicing entities (patent trolls) impact innovation and technological progress? The question has enormous importance to industrial policy, with little direct evidence to inform it. This chapter provides new evidence on the subject, both theoretically and empirically. In doing so, I inform the debate that has portrayed non-practicing entities (NPEs) alternatively as benign middlemen that help to reallocate IP to where it is most productive or stick-up artists that exploit the patent system to extract rents, thereby hurting innovation. I make use of unprecedented access to NPE-derived patent and financial data as well as a novel model that guides my data analysis. I find that NPEs target patents coming from small firms and those that are more litigation-prone, as well as ones that are not core to a company\u27s business. When NPEs license patents, those that generate higher fees are closer to the licensee\u27s business and more likely to be litigated. I also find that downstream innovation drops in fields where patents have been acquired by an NPE. Finally, my numerical analysis shows that the existence of the NPE encourages upstream innovation and discourages downstream innovation. I also find that the impact of an NPE on the overall innovation depends on the fraction of infringements coming from non-innovating producers. My results provide some support for both views of NPEs and suggest that a more nuanced perspective on NPEs as well as additional empirical work is necessary before informed policy decisions can be made