The optimal life of a patent when the timing of innovation is stochastic

I re-examine the problem of optimal patent life within a model where the timing of innovations is stochastic. It is assumed that innovations occur according to a Poisson stochastic process where the hazard function is linear in R&D effort. Firms performing R&D have to pay a fixed cost, and there is free entry in the R&D industry. Among the comparative statics results, I show that small innovations should be protected more than larger ones. Also, when the patent life is set optimally, there is under-investment in R&D. (C) 1999 Elsevier Science B.V. All rights reserved.