Alberto Galasso

Trading and Enforcing Patent Rights

We study how the market for innovation affects enforcement of patent rights. Conventional wisdom associates the gains from trade with comparative advantage in manufacturing or marketing. We show that these gains imply that patent transactions should increase litigation risk. We identify a new source of gains from trade, comparative advantage in patent enforcement, and show that transactions driven by this motive should reduce litigation. Using data on trade and litigation of individually-owned patents in the U.S., we exploit variation in capital gains tax rates as an instrument to identify the causal effect of trade on litigation. We find that taxes strongly affect patent transactions, and that reallocation of patent rights reduces litigation risk, on average. The impact of trade on litigation is heterogeneous, however. Patents with larger potential gains from trade are more likely to change ownership, suggesting that the market for innovation is efficient. We also show that the impact of trade on litigation depends on characteristics of the transactions.

Broad Cross-License Negotiations

In many industries, broad cross-license agreements are considered a useful method to obtain freedom to operate and to avoid patent litigation. In this paper I study firm incentives to sign a broad cross-license as well as the duration of broad cross-license negotiations. I develop a model of bargaining with learning, which predicts that two firms will enter a broad cross-license agreement only if their capital intensities are large enough. The model also predicts faster negotiations when firms have high capital intensities and when the frequency of future disputes is low. I confirm these predictions empirically using a novel dataset on cross-licensing and litigation in the U.S. semiconductor industry.

Roads and Innovation

We exploit historical data on planned highways, railroads, and exploration routes as sources of exogenous variation in order to estimate the effect of interstate highways on regional innovation: a 10% increase in a regions stock of highways causes a 1.7% increase in regional patenting over a five-year period. In terms of the mechanism, we report evidence that roads facilitate local knowledge flows, increasing the likelihood that innovators access knowledge inputs from local but more distant neighbors. Thus, transportation infrastructure may spur regional growth above and beyond the more commonly discussed agglomeration economies predicated on an inflow of new workers.

Over-Confidence may Reduce Negotiation Delay

Abstract When a seller negotiates with multiple buyers, how does over-confidence affect the timing of trade? In this paper we distinguish between over-confidence about trade opportunities and over-confidence about the terms of trade. In bargaining environments without externalities both types of over-confidence can cause delays in agreement. If externalities are present the two forms of subjective bias have very different impacts on delay. In particular, over-confidence about trade opportunities may reduce bargaining delay.

Patents Rights and Innovation by Small and Large Firms

This paper studies the causal impact of patents on subsequent innovation by the patent holder. The analysis is based on court invalidation of patents by the U.S. Court of Appeals for the Federal Circuit, and exploits the random allocation of judges to control for the endogeneity of the judicial decision. Patent invalidation leads to a 50 percent decrease in patenting by the patent holder, on average, but the impact depends critically on characteristics of the patentee and the competitive environment. The effect is entirely driven by small innovative firms in technology fields where they face many large incumbents. Invalidation of patents held by large firms does not change the intensity of their innovation but shifts the technological direction of their subsequent patenting.

Switching to Green: The Timing of Socially Responsible Innovation

We develop a timing game for adopting a product technology that features a public good. We investigate the effects of the degree of product market competition, product differentiation, the private benefits from contributing to the public good, and firm asymmetries on the timing of adoption. We then examine the effects of consumer subsidies on equilibrium timings and the proliferation of the public good.

Patent rights, innovation, and firm exit

We study the causal impact of patent invalidation on subsequent innovation and exit by the patent holder. The analysis is based on patent litigation at the U.S. Court of Appeals for the Federal Circuit, and exploits the random allocation of judges to control for endogeneity of the judicial decision. Invalidation causes the patent holder to reduce subsequent patenting over a five-year window by 50 percent on average, but the effect is heterogeneous. The impact is large for small and medium-sized firms, particularly in technology fields where they face many large competitors, and for patents central to their technology portfolio. We find no significant effect for large firms. Invalidation also significantly increases the likelihood that small firms exit from patenting entirely.

Tort Reform and Innovation

Current academic and policy debates focus on the impact of tort reforms on physicians’ behavior and medical costs. This paper examines whether these reforms also affect incentives to develop new technologies. We develop a theoretical model that predicts that the impact of reducing liability risks for physicians on innovation may be positive or negative, depending on the characteristics of the technology. Empirically, we find that, on average, laws that limit the liability exposure of health care providers are associated with a significant reduction in medical device patenting. Tort reforms have the strongest impact in medical fields in which the probability of facing a malpractice claim is the largest, and they do not seem to affect the number of new technologies of the highest and lowest quality. Our results underscore the importance of considering dynamic effects in the economic analysis of tort laws.

Market outcomes and dynamic patent buyouts

Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify new reward mechanisms which complement the patent system and reduce prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government’s innovation policy, and are also widely implemented by private philanthropists. In this paper we describe situations in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent’s life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives.

A theory of grand innovation prizes

The past decade has witnessed a resurgence in innovation awards, in particular of Grand Innovation Prizes (GIPs) which are rewards to innovators developing technologies reaching performance goals and requiring breakthrough solutions. GIPs typically do not preclude the winner also obtaining patent rights. This is in stark contrast with mainstream economics of innovation theories where prizes and patents are substitute ways to generate revenue and encourage innovation. Building on the management of innovation literature which stresses the difficulty to specify exante all the technical features of the winning technologies, we develop a model in which innovative effort is multi-dimensional and only a subset of innovation tasks can be measured and contracted upon. We show that in this environment patent rights and cash rewards are complements, and that GIPs are often preferable to patent races or prizes requiring technologies to be placed in the public domain. Moreover, our model uncovers a tendency for patent races to encourage speed of discovery over quality of innovation, which can be corrected by GIPs. We explore robustness to endogenous entry, costly public funds, and incomplete information by GIP organizers on the surplus created by the technology.