Spillover effects of intellectual property protection in the interwar aircraft industry

What is this research about and why did you do it?

Intellectual property (IP) protection, offered through patents, copyright, and a variety of other mechanisms, is one of the primary policies that countries use to support innovation. However, the form and strength of IP protection remains a subject of vigorous debate. Our study improves our understanding of IP protection in order to help policymakers design more effective IP systems. We focus on a potentially important but understudied aspect of IP protection; the fact that IP protection offered to firms in one sector can, by enhancing their market power, affect the amount of innovation undertaken by firms in other related technology areas.

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How did you answer this question?

To examine this issue, we use a unique historical policy experiment in the U.S. aircraft industry. As a result of concerns about profiteering during World War I, the US Congress essentially eliminated IP protection for producers of military aircraft—but not aircraft components such as aero-engines—in the early 1920s. This policy regime persisted until 1926, when concerns about the slow rate of innovation led to the reintroduction of IP protection for airframe producers. Our study examines changes in innovation in airframes as well as in aero-engines, where IP protection was available throughout.

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What did you find?

Our results show that strengthening the IP protection available to airframe producers led to an acceleration in the rate of increase of airframe performance, as shown in Figure 1, which compares key performance indicators in the U.S. to the U.K. before vs. after the policy change. However, we also observe a slowdown in the rate of improvement of aero-engines. We can explain these patterns using a simple model in which the innovation decisions of aero-engine producers are influenced by the market power of airframe producers, which increased as a result of IP protection.

Airframe performance trends in the U.S. and the U.K. before and after the introduction of IP protection in the U.S. in 1926

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What implications does this have for the study (research and teaching) of wealth concentration or economic inequality?

Innovation can be an important avenue for upward mobility, but whether this potential is realized depends on the openness of the innovation system. Our results highlight how the market power of firms in one branch of an industry can constrain innovation in other related areas. This is particularly important given recent concerns about growing concentration and rising market power in some of the most innovative sectors of the economy.

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What are the next steps in your agenda?

In ongoing work, we are looking at how the openness of the innovation system affected who became an inventor, and in particular, how the emergence of new groups of specialist inventors, such as engineers, contributed to long-term economic growth.

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Citation

Hanlon, W. W., and Jaworski, T. (2022). “Spillover Effects of Intellectual Property Protection in the Interwar Aircraft Industry,” The Economic Journal, 132(645), pp. 1824-1851.