Essays on the Dynamics of Innovation

This thesis studies dynamic incentives that firms face when developing an innovation. Chapter one studies how patent policy affects firms' R&D investments in the context of sequential innovation, i.e.when firms' innovations build upon each other. Also, it studies how different tools provided by patent policy affect the firms' investments decisions. The main findings are that, unlike the predictions of the classic literature, patents that last too long are detrimental for innovation. In particular, long patents reduce the firms incentives to innovate, decreasing the economy's innovation speed. Optimal patent policy depends on markets characteristics. In particular, patent length is a more effective tool to promote innovation in markets that inventions are slow or costly. In contrast, forward protection is more effective in markets in which innovations are frequent.;Chapter two builds upon the methodology developed in Chapter 1 and studies the incumbent's dynamic incentives to grant a license to his competitors. Necessary and sufficient conditions for an innovation to be licensed before its expiration date are derived. Although patent policy do not affect the firms decision of whether to license an invention, it does affect the decision of when to grant the license. In particular, stronger patent policy—understood as longer patents or higher degree of forward protection—delays the incumbent's licensing decision. From a social perspective licensing is always efficient. Therefore, stronger patent policy leads to a greater loss in efficiency.;Finally, Chapter 3 studies the effect of knowledge spillovers in patent races in which firms learn from their R&D investments. Larger spillovers increase how much projects are pursued but decrease the intensity of the R&D. Spillovers are not always beneficial to the firms. In particular, spillovers harm firms when patents last for too long or the post-innovation market competition is intense. In contrast, in markets with a great degree of product differentiation, spillovers increase the firms valuation for the project. When spillovers are negatively associated with the distance among firms, this work provides predictions about which markets will tend to cluster that are consistent with the empirical evidence.