Do Stronger Patents Lead to Faster Innovation? The Effect of Clustered Search

We analyze a patent race between two firms choosing between an established and an innovative method. The unique Markov-perfect equilibrium coincides with the cartel solution if and only if firms have the same ability of leveraging a good innovative method or there is no patent protection. Otherwise, equilibrium efforts are clustered too much in the innovative method, as compared to the cartel benchmark. The expected time to a breakthrough is minimized at an interior patent strength. Thus, a decrease in R&D productivity can go hand-in-hand with a concentration of research efforts in riskier areas and stronger patent protections.