Intellectual Property Rights Protection and Innovation: Evidence from Compensatory Patent Term Adjustments

How does the strength of intellectual property rights protection affect innovation? I examine this question in the context of the U.S. patent system, where inventors receive patent term adjustments as compensation for administrative delays at the patent office. Exploiting the quasi-random assignment of patent applications to examiners, I use an instrumental variables approach to identify the causal effect of longer patent terms on follow-on innovation. My findings show that extended patent protection reduces subsequent innovation, with stronger effects as the duration increases. This negative impact is observed for both narrow and broad patents but is more pronounced for those with broader protection. Moreover, shorter patent screening periods and higher patent quality mitigate these adverse effects. Overall, the results suggest that while stronger patent protection benefits inventors, it may impose wider societal costs by hindering cumulative innovation.