RAND Journal of Economics, forthcoming, January 23, 2013
We study how the market for innovation affects enforcement of patent rights.
Taxes strongly affect transactions of individually owned patents and reallocation of patent rights reduces litigation risk, on average.
Conventional wisdom associates the gains from patent trade with comparative advantage in manufacturing or marketing.
The study identifies a new source of gains from trade, comparative advantage in patent enforcement, and shows that transactions driven by this motive should reduce litigation.
Focusing on US individually owned patents during the period 1983-2000, the study finds that increases in capital gain taxes strongly reduces the likelihood of patent trade. On average, patents that change ownership because of a change in capital gains taxation experience a reduction in litigation risk.
The impact of trade on litigation is heterogeneous. Patents with larger potential gains from trade are more likely to change ownership, and the impact of trade on litigation depends on characteristics of the transactions.