Author(s)
Source
TNIT Seminar, 2010
Summary
This paper considers how to best use prizes and intellectual property rights to reward innovation.
Policy Relevance
Rewarding inventors with a mix of monetary prizes and intellectual property rights often works best. Prizes are more useful when inventions have low and well-known values, and when it is easy to get inventors to work.
Main Points
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Grants of intellectual property (IP) rights, like patents and copyrights, reward inventors for their work, and encourage innovation.
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IP rights also make markets work less well. For example, consumers pay more for patented goods and get fewer than they would like.
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If inventors received a monetary prize instead of IP rights, market distortions like higher prices for patented goods, could be avoided and innovation would still be rewarded.
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However, it is hard to tell which innovations deserve prizes, even after new goods enter the market. This is not a problem with IP rights, which reward inventors proportionately to the value of their inventions.
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Mixing IP rights with financial prizes is often the most efficient way to reward valuable inventions while minimizing market distortions. For example, innovators who receive a patent could also be granted tax benefits or even a cash reward. IP rights should be a greater part of the reward when:
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Inventions are expected to be highly valuable;
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It is difficult to guess with precision how valuable an invention will turn out to be;
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Inventors are more responsive to rewards.
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The optimality of mixing IP rights and financial prizes might not hold in more complex markets and when innovation is a complicated process.