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The authors consider a cumulative innovation process in which a follow-on innovator invests in R&D activities that influence both the expected commercial value of the innovation as well as the probability of infringing on the patent of an earlier inventor. They show that, when the second innovator investments are not observable, ex-ante licensing agreements are ineffective and the follow-on innovator fails to invest efficiently. Because of this inefficiency, a large patent breadth may be harmful for the first innovator too, and therefore it may be Pareto-dominated. This occurs when a large patent breadth exacerbates the overinvestment or the underinvestment of the follow-on innovator.
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