| Summary: | Patent boxes significantly reduce the tax rate applied to income earned from a
patent. Existing work finds that those reductions increase the number of patents.
That said, not all patents are equally novel. In particular, the patent box encourages
the submission of patents of marginal novelty, a selection effect that would reduce the
average success rates of patents. At the same time, the increased return to patenting
encourages additional effort in application preparation and prosecution, increasing success rates. While this predicts an ambiguous effect, due to lower financing costs, the
net impact should be smaller for frequent innovators. We use data from applications
to the European Patent Office from 1978 to 2017 and find that the introduction of a
patent box increases the average success rate of applications by 4.4 percentage points,
with the estimated effect becoming negative for frequent innovators. We further find
that this effect is greater when boxes apply only to new innovations and when local
development is required to access tax reductions. This suggests that for the frequent
innovators, who form the bulk of submissions, patent boxes may indeed be encouraging
the submission of marginally-novel applications.
|
|---|