Maximizing Social Welfare Through the Tailoring of Patent Duration and Using Algorithms to Calculate Optimal Patent Duration

Patents are legal devices granted by the government that confer inventors exclusive rights to their invention for a limited time. In exchange, the U.S. government requires the inventors to publicly disclose their invention to allow individuals to recreate it upon expiration of the exclusivity period. Previously, academics regarded patents as a necessary means to overcome the free-rider dilemma (“FRD”), and they assumed that, without patents, society would be deprived of many potentially valuable innovations. This model has come under criticism. Researchers point to cases where inventors would have innovated regardless of a patent grant. They also highlight instances where patent owners use patents in ways not originally contemplated under this model and that create additional societal deadweight loss. Furthermore, patents have a standardized term of duration, which, in many cases, is counterproductive to the patent system’s intended goal of maximizing social welfare. This note explores and categorizes some of the external, noneconomic alternative mechanisms that incentivize innovation and result in inventors overcoming the FRD. This note also points to factors that affect an inventor’s responsiveness to incentive mechanisms, such as industry type. The note then considers different policy levers that affect patent strength, emphasizing patent duration. The note explores how these levers interact with incentive mechanisms to create optimal duration patents that maximize social welfare. Lastly, this note proposes an algorithm for calculating optimal patent duration and identifies essential variables for feeding into the algorithm