Abstract
This study develops an R&D-based growth model that features both vertical and horizontal innovation to shed some light on the cur-rent debate on whether patent protection stimulates or stifles innova-
tion. Speci
cally, we analyze the growth and welfare e¤ects of patent protection in the form of pro
t division between sequential innovators along the quality ladder. We show that patent protection has asym-metric e¤ects on vertical innovation (i.e., quality improvement) and horizontal innovation (i.e., variety expansion). Maximizing the incentives for vertical (horizontal) innovation requires a pro
t-division rule that assigns the entire ow pro
t to the entrant (incumbent) of a quality ladder. In light of this
nding, we argue that in order to properly analyze the growth and welfare implications of patent protection, it is important to disentangle its di¤erent e¤ects on vertical and horizontal innovation.
JEL classi
cation: O31, O34, O40
Keywords: economic growth, innovation, intellectual property rights
