Optimal patent policy and wealth inequality in a Schumpeterian economy

Does wealth inequality affect optimal patent policy? This study develops a Schumpeterian growth model with heterogeneous households to explore this question. Our model features a general innovation specification that nests two common specifications: (a) the knowledge-driven specification that uses R&D labor, and (b) the lab-equipment specification that uses final output for R&D. Under the knowledge-driven specification, all households prefer the same level of patent protection. However, under the lab-equipment specification, less wealthy households prefer weaker patent protection, so an unequal distribution of wealth reduces optimal patent protection and economic growth. Under the general innovation specification, strengthening patent protection has an inverted-U effect on innovation, in contrast to the positive effect under the two special cases. More importantly, an unequal wealth distribution continues to reduce optimal patent protection. Calibrating the model to US data, we find that eliminating wealth inequality raises economic growth by about 0.5% via stronger patent protection.