Upstream innovation protection: common law evolution and the dynamics of wage inequality

The incentives to conduct basic or applied research play a central role for economic growth, and this question has not been explored in much detail so far. How does increasing early innovation appropriability affect basic research, applied research, education, and wage inequality? In the US, what does the common law system imply on the macroeconomic responses to institutional change? This paper analyzes the macroeconomic e¤ects of patent protection by incorporating a two-stage cumulative innovation structure into a quality-ladder growth model with skill acquisition. We consider three issues (a) the over-protection vs. the under-protection of intellectual
property rights; (b) the evolution of jurisprudence shaping the bargaining power of the upstream innovators; and (c) the implications of strengthening patent protection on wage inequality and growth. We show analytically and numerically how the jurisprudential changes in intellectual property rights witnessed in the US after 1980 can be related to the well-known changes in wage inequality and in education attainments. Basic research patents may have grown disproportionately due increasing jurisdictional protection, eventually compromising applied innovation, education, and growth. By simulations, we show that the dynamic general equilibrium interations may mislead the econometric assessment of the temporary vs persistent e¤ects IPR policy.