Does intellectual monopoly stimulate or stifle innovation ?

This study develops an R&D-based growth model with vertical and horizontal innovation to shed some light on the current debate on whether patent protection stimulates or sti‡es innovation. We analyze the e¤ects of patent protection in the form of blocking patents. We show that patent protection changes the direction of innovation by having asymmetric e¤ects on vertical innovation (i.e., quality improvement) and horizontal innovation (i.e., variety expansion). Calibrating the model and simulating the transition dynamics, we …nd that strengthening the e¤ect of blocking patents sti‡es vertical innovation and decreases economic growth but increases social welfare due to an increase in horizontal innovation. 1 In light of this …nding, we argue that in order to properly analyze the growth and welfare implications of patents, it is important to consider their often neglected compositional e¤ects on vertical and horizontal innovation. Keywords: economic growth, innovation, intellectual property rights. JEL classi…cation: O31, O34, O40. We would like to thank the seminar participants at Academia Sinica, Chinese University of Hong Kong, ETH Zurich, Kyoto University, National Taiwan University, Royal Economic Society, Shanghai Macroeconomic Workshop, and Taipei International Conference on Growth, Trade and Dynamics for their helpful comments and suggestions. The usual disclaimer applies. The previous version of this paper was circulated under the title "Innovation-Speci…c Patent Protection".