Patenting uncertainty and its impact on innovation: evidence from the United States

This paper investigates the effect of patenting uncertainty on innovations. Although the patent system was established to provide incentives and certainty of returns to innovators, the patenting process itself contains elements of uncertainty, including pendency and variation in grant ratios. We use time series data on patent applications and patent grants from the United States and measure patent uncertainty in terms of variation in the grant ratio, i.e., the difference in the number of patent applications and the number of patent grants. Findings show that greater patent uncertainty has a depressing effect on innovation rates. Moreover, our findings reveal important differences between the short-run and long-run effects and between overall patents and utility patents. We also consider the effects of the America Invents Act and find that the Act led to more patent applications. Besides adding to the literature, these findings underscore the point that transaction costs of patenting might be undermining the intent of innovation policy by reducing innovation.