Innovation Fertility and Patent Design

It may be advantageous to provide a variety of kinds of patent protection to heterogenous innovations. Innovations which benefit society largely through their use as building blocks to future inventions may require a different scope of protection in order to be encouraged. We model the problem of designing an optimal patent menu (scope and length) when the fertility of an innovation in generating more innovations cannot be observed. The menu of patent scope can be implemented with mandated buyout fees. Evidence of heterogeneous fertility and patent obsolescence, keys to the model, are presented using patent data from the US.