Intellectual Property Law and Public Sponsorship of R&D in a Schumpeterian Growth Model with Fundamental and Applied R&D

We investigate, within a Schumpeterian growth model, how intellectual property (IP) law and public sponsorship of research and development (R&D) activities may provide appropriate incentives simultaneously to fundamental (or basic) research and to applied R&D. In order to consider and to distinguish between these two types of research, we merge the seminal models of Romer [1990] and Aghion and Howitt [1992]: knowledge accumulation stems from a series of inventions (horizontal / fundamental knowledge accumulation) and from a succession of innovations (vertical / applied knowledge accumulation) building upon each of these inventions. Then, we study a decentralized economy in which the creative destruction mechanism does not deter investments in fundamental research through an IP law design that induces profit-division between an inventor and his following innovators. We show that providing optimal incentives to fundamental research requires, not only a design of IP law that ensures a sufficient positive transfer from innovators to inventors, but also public policies in form of subsidies supporting both fundamental research and applied R&D activities.