Research on Innovation

Research on Innovation Working Papers

More Machines or Better Machines? Abstract: Using an engineering production function and detailed information on major inventions in nineteenth century cotton weaving, this paper explores how much of the rapid growth in labor productivity arose from capital-labor substitution and how much from technical change. I find that labor-saving technical change accounts for almost all of the growth. However, much of the labor-saving bias arose not from inventions, but from acquisition of new knowledge and skills by weavers. Moreover, this was endogenous, influenced by wages and prices. This provides a technology-based explanation for the persistent association between economic growth and capital deepening.
By James Bessen
Accounting for Productivity Growth When Technical Change is Biased Abstract: Solow (1957) decomposed labor productivity growth into two components that are independent under Hicks neutrality: input growth and the residual, representing technical change. However, when technical change is Hicks biased, input growth is no longer independent of technical change, leading to ambiguous interpretation. Using Solow’s model, I decompose output per worker into globally independent sources. Adding a simple calculation to Solow’s framework, I show that technical bias directly contributes to labor productivity growth above what is captured in the Solow residual. This contribution is sometimes large, leading to rates of total technical change that substantially exceed the Solow residual.
By James Bessen
Do Patents Perform Like Property? Abstract: Do patents provide critical incentives to encourage investment in innovation? Or, instead, do patents impose legal risks and burdens on innovators that discourage innovation, as some critics now claim? This paper reviews empirical economic evidence on how well patents perform as a property system.
By James Bessen and Michael J. Meurer
forthcoming in Academy of Management Perspectives
What's Wrong with the Patent System? Fuzzy Boundaries and the Patent Tax
By James Bessen and Michael J. Meurer
from First Monday, volume 12, number 6 (June 2007)
The Private Costs of Patent Litigation Abstract: This paper estimates the total cost of patent litigation to alleged infringers. We use a large sample of stock market event studies around the date of lawsuit filings for US public firms from 1984-99. We find that the total costs of litigation are much greater than legal fees and costs are large even for lawsuits that settle. Lawsuits cost alleged infringers about $28.7 million ($92) in the mean and $2.9 million in the median. Moreover, infringement risk rose sharply during the late 1990s to over 14% of R&D spending. Small firms have lower risk relative to R&D.
By James Bessen and Michael J. Meurer
Estimates of Firms' Patent Rents from Firm Market Value Abstract: A simple formal model shows that estimates of an upper bound on the value of firms' patent rents can be obtained from regressions on Tobin's Q. I test this model on a sample of US firms and find it is robust to a variety of considerations. The estimates correspond well with implied estimates derived from previous research. Also, these upper bound estimates are only modestly higher than estimates of patent value obtained from data on patent renewals international patent filings. This suggests that these techniques do not substantially understate patent value.
By James Bessen
The Value of U.S. Patents by Owner and Patent Characteristics Abstract: This paper uses renewal data to estimate the value of U.S. patents, controlling for patent and owner characteristics. Estimates of U.S. patent value are substantially larger than estimates for European patents, however, the ratio of U.S. patent value to R&D for firms is only about 3%. Patents issued to small patentees are much less valuable than those issued to large corporations, perhaps reflecting imperfect markets for technology. Litigated patents are more valuable, as are highly cited patents. However, patent citations explain little variance in value, suggesting limits to their use as a measure of patent quality.
By James Bessen
Research Policy, 37 (2008), pp. 932-45.
Patent Litigation with Endogenous Disputes
by James Bessen and Michael J. Meurer
American Economic Review, 96, no. 2, pp. 77-81 (2006).
Lessons for Patent Policy from Empirical Research on Patent Litigation Abstract: This Article reviews empirical patent litigation research to reveal patent policy lessons. First, the Article presents facts about patent litigation. Next, it analyzes the patent premium. Patent litigation research reveals little about the magnitude of the patent premium, but the research reveals the strategies firms use to capture the patent premium and the patent policy instruments that determine the patent premium. Next, the Article evaluates the patent prosecution process and notes that making efforts to refine a patent application can affect the value of the patent. The Article then identifies reforms for improving PTO performance. Finally, the Article discusses policy changes that patent litigation research suggests would improve procedural fairness and reduce patent litigation costs.
By James Bessen and Michael J. Meurer
9 Lewis and Clark Law Review 1 (2005)
The Patent Litigation Explosion Abstract: This paper provides the first look at patent litigation hazards for public firms during the 80s and 90s. Consistent with our model, litigation is more likely when prospective defendants spend more on R&D, when prospective plaintiffs acquire more patents and when firms are larger and technologically close. Public firms face dramatically increased hazards of litigation as plaintiffs and even more rapidly increasing hazards as defendants, especially for small public firms. The increase cannot be explained by patenting rates, R&D, firm value or industry composition. Legal changes are the most likely explanation.
By James Bessen and Michael J. Meurer
A Comment on “Do Patents Facilitate Financing in the Software Industry?” Abstract: “Do Patents Facilitate Financing in the Software Industry?” by Ronald J. Mann contributes empirical evidence to our understanding of how software startups use patents. However, a close examination of the actual empirical findings in this paper points to rather different conclusions than those that Mann draws, namely: few software startups benefits from software patents and patents are not widely used by software firms to obtain venture financing. Indeed, among other things, the paper reports that 80% of venture-financed software startups had not acquired any patents within four years of receiving financing.
By James Bessen
Patents and the Diffusion of Technical Information Abstract: Does the disclosure requirement of the patent system encourage the diffusion of inventions? This paper builds a simple model where firms choose between patents and trade secrecy to protect inventions. Diffusion is not more likely with a patent system nor is the “market for technology” necessarily greater.
By James Bessen
Economics Letters, v. 86, no. 1, pp. 121-128.
Where Have All the Great Inventors Gone?
By James Bessen
Patent Thickets: Strategic Patenting of Complex Technologies Abstract: Patent race models assume that an innovator wins the only patent covering a product. But when technologies are complex, firms may build “thickets” of patents covering product markets and assert them aggressively. Then innovators share rents with other patentholders under cross-licenses, making R&D incentives sub-optimal. On the other hand, first mover advantages may provide stronger, even optimal, R&D incentives as long as firms pursue patent strategies of “mutual non-aggression.” I find that firms license aggressively when patenting standards are low, especially incumbent firms in mature industries. But high patenting standards encourage non-aggressive strategies that are critical for strong R&D incentives.
By James Bessen
An Empirical Look at Software Patents Abstract: U.S. legal changes have made it easier to obtain patents on inventions that use software. Software patents have grown rapidly and now comprise 15 percent of all patents. They are acquired primarily by large manufacturing firms in industries known for strategic patenting; only 5 percent belong to software publishers. The very large increase in software patent propensity over time is not adequately explained by changes in R&D investments, employment of computer programmers, or productivity growth. The residual increase in patent propensity is consistent with a sizeable rise in the cost effectiveness of software patents during the 1990s. We find, evidence that software patents substitute for R&D at the firm level; they are associated with lower R&D intensity. This result occurs mainly in industries known for strategic patenting and is difficult to reconcile with the traditional incentive theory of patents.
By James Bessen and Robert M. Hunt (Federal Reserve Bank of Phila.)
see also Journal of Economics and Management Strategy 16, no. 1, pp. 157-89 (2007).
The Software Patent Experiment
By James Bessen and Robert M. Hunt (Federal Reserve Bank of Phila.)
see also Proceedings, “Patents, Innovation and Economic Performance,” OECD, April, 2003
and
Business Review, Federal Reserve Bank of Philadelphia (2004)
A Reply to Hahn and Wallsten Abstract: A reply to criticism of an early draft of “An Empirical Look at Software Patents.”
By James Bessen and Robert M. Hunt (Federal Reserve Bank of Phila.)
Hold-up and Patent Licensing of Cumulative Innovations with Private Information Abstract:When innovation is cumulative, early patentees can hold up later innovators. Under complete information, licensing before R&D avoids holdup. But when development costs are private information, ex ante licensing may only occur in regimes with sub-optimal patent policy.
By James Bessen
Economics Letters 82, No. 3, pp. 321-26 (2004).
What Good is Free Software?
By James Bessen
in Robert Hahn, editor, Government Policy toward Open Source Software, AEI-Brookings Joint Center for Regulatory Studies, Washington, DC (2002).
Open Source Software: Free Provision of Complex Public Goods Abstract: Open source software, developed by volunteers, appears counter to the conventional wisdom that private provision of public goods is socially more efficient. But complexity makes a difference. Under standard models, development contracts for specialized software may be difficult to write and ownership rights do not necessarily elicit socially optimal effort. I consider three mechanisms that improve the likelihood that firms can obtain the software they need: pre-packaged software, Application Program Interfaces (APIs) and Free/Open Source software (FOSS). I show that with complex software, some firms will choose to participate in FOSS over both “make or buy” and this increases social welfare. In general, FOSS complements proprietary provision, rather than replacing it. Pre-packaged software can coexist in the marketplace with FOSS: pre-packaged software addresses common uses with limited feature sets, while firms with specialized, more complex needs use FOSS.
By James Bessen
in Jürgen Bitzer and Philipp J. H. Schröder, eds., The Economics of Open Source Software Development, Elsevier B. V. (2006).
Sequential Innovation, Patents and Imitation Abstract: How could industries such as software, semiconductors, and computers have been so innovative despite historically weak patent protection? We argue that if innovation is both “sequential” (each invention builds on its predecessor) and “complementary” (a diversity of innovators raises the chances of discovery), a firm's profit may actually be enhanced by competition, and a patent system may interfere with such competition and with innovation. A natural experiment in the software industry and the positive relationship between innovation and firm entry provide support for our model. (Original 2000 version)
By James Bessen and Eric S. Maskin, Institute for Advanced Study
auf Deutsch
see also RAND Journal of Economics forthcoming
Intellectual Property on the Internet: What's Wrong with Conventional Wisdom?
By James Bessen and Eric S. Maskin, Institute for Advanced Study
German version appears in Lutterbeck, Bernd, Robert A. Gehring, and Matthias Bärwolff eds., Open Source Jahrbuch 2005: Zwischen Softwareentwicklung und Gesellschaftsmodell, Berlin: Lehmanns Media
Real Options and the Adoption of New Technologies Abstract: New technologies typically improve over time. Firms adopting new technologies expect future vintages to be superior, and, with free entry, to bring lower prices. Hence firms may value the option to wait before making irreversible investment. Traditional means of accounting for obsolescence do not fully capture these considerations. This paper develops a real options model for investment in new technology. Even modest rates of incremental improvement lead firms to raise investment thresholds substantially. This typically delays first adoption for many years. Thresholds are affected by the rate of productivity improvement, interest rates, demand growth and price uncertainty. As an application, investment thresholds are calculated for the adoption of new spinning technology in the British cotton industry at the turn of the century.
By James Bessen
The Skills of the Unskilled in the American Industrial Revolution Abstract: Were ordinary factory workers unskilled and was technology "de-skilling" during the Industrial Revolution? I measure foregone output to estimate the human capital investments in mule spinners and power loom tenders in ante-bellum Lowell. These investments rivaled those of craft apprentices, suggesting a different view of industrial technology. Accounting for skill, multi-factor productivity growth was negligible, contrary to previous findings. From 1834-55, firms made increasing investments in skill, allowing workers to tend more machines and generating rapid growth of per-capita output. This growing investment was motivated partly by changing factor prices and more by a changing labor supply. Calculations show that firm policy and social conditions, including literacy, influenced the investment in factory skills. When skills are considered, technological change at Lowell appears as a broad social process, dependent as much on innovation in institutions as on invention of machines.
By James Bessen
see also “Technology and Learning by Factory Workers: The Stretch-Out at Lowell, 1842,” Journal of Economic History (2003).
Technology Adoption Costs and Productivity Growth: The Transition to Information Technology Abstract: Using two panels of U.S. manufacturing industries, this paper estimates capital adjustment costs from 1961 to 1996. I find that from 1974-83 adjustment costs rose sharply�they more than doubled from about 3% of output to around 7%. Moreover, this increase is specifically associated with a shift to investment in information technology. But such large adoption costs imply that the Solow residual mismeasures productivity growth: adoption costs are resource costs representing an unmeasured investment. I find that when this investment is included, productivity grew about 0.4% per annum faster than official measures during the 70's and early 80's, reducing the size of the productivity “slowdown.” Indeed, estimated productivity growth rates were roughly the same from 1974-88 as from 1949-73. Thus technology transitions critically affect productivity growth measurement.
By James Bessen
see also “Technology Adoption Costs and Productivity Growth: The Transition to Information Technology,” Review of Economic Dynamics (2002).
Productivity Adjustments and Learning-by-Doing as Human Capital Abstract: This paper measures plant-level productivity gains associated with learning curves across the entire manufacturing sector. We measure these gains at plant startups and also after major employment changes. We find: 1.) The gains are strongly associated with a variety of human capital measures implying that learning-by-doing is largely a firm-specific human capital investment. 2.) This implicit investment is large; many plants invest as much in learning-by-doing as they invest in physical capital and more than they invest in formal job training or R&D. 3.) This investment differs persistently over industries and is higher with greater R&D; hence measured returns to R&D may be overstated. 4.) Consistent with a search model, the human capital investment is much larger following employment decreases than increases. We conclude that learning-by-doing is a major factor in wage determination, the adoption of new technologies and asymmetric employment adjustment costs.
By James Bessen
Discussion Paper 97-17 by the Center for Economics Studies, U. S. Census Bureau