Patents, Research Exemption, and the Incentive for Sequential Innovation

This paper develops a dynamic duopoly model of R&D competition to improve the quality of a final good. The authors find that firms, ex ante, always prefer full patent protection. The welfare ranking of the two IPR regimes, on the other hand, depends on the relative magnitudes of the costs of initial innovation and improvements. In particular, a research exemption is most likely to provide inadequate R&D incentives when there is a large cost to establish the initial research program.