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Abstract
When a new technology consists of sequences of innovations that culminate in a final
consumer product, the balance between successive innovators is one of the main concerns
in the design of the patent system. While intertemporal aspects of incentive are critical in
this environment of sequential innovations, time plays a minor role in existing literature on
dynamic models. By focusing on the incentives of follow-on innovators who
commercialize an initial invention, this study examines the dynamic implications of the
patent instrument (e.g., patent life) via a positive analysis. It shows that a long patent life
may encourage innovation incentives and increase social welfare, contrary to existing
arguments that argue that long patent life always discourages the incentive for subsequent
innovations. This study also examines the implications of finite patent system in different
market structures.