Employed inventors, inter-firm mobility, bonus pay with multi-stage R&D processes, and optimal innovation policy

A temporary change in pay to employed inventors around the time of patent application has been observed in
a number of countries. A theoretical model is here developed to provide an explanation to said findings based
on the idea that inventors may be able to use the knowledge previously generated while working in a firm, in
a rival company. The model features firms who hire workers in R&D functions to make product innovations.
The innovation process consists of distinct phases separated by a patent application. Firms compete to attract
workers, and workers can transfer part of the generated new knowledge to a new employer. Results suggest
that the capital intensity of R&D investments, and the type and size of knowledge spillovers, may affect the
probability to observe bonus pay at the time of a patent application.
Different tax incentives and subsidies are then studied as a means to correct for possible under-investment of
capital. We study the effect of a patent box, a subsidy to R&D capital investments, and a subsidy to bonus
pay. When market rivalry prevails over positive knowledge externalities, a bonus pay incentive was found to
obtain the social first-best while a patent box or a subsidy to capital investment would cause overinvestment.
When positive knowledge externalities prevail, either a patent box or a subsidy to capital investment obtain
the social optimal level of capital investments.

Authors:

D'ANDRIA Diego