In this paper, we study the determinants of patent quality and volume of patent applications when inventors care about perceived patent quality. We analyze the effects of various policy reforms, specifically, a proposal to establish a two-tiered patent system. In the two-tiered system, applicants can choose between a regular patent and a more costly, possibly more thoroughly examined, ‘gold-plate’ patent. Introducing a second patent-tier can reduce patent applications, reduce the incidence of bad patents, and sometimes increase social welfare. The gold-plate tier attracts inventors with high ex-ante probability of validity, but not necessarily applicants with innovations of high economic value.