Materialistic Genius and Market Power: Uncovering the Best Innovations

Innovation and Economic Growth and Intellectual Property

Article Snapshot


Jean Tirole and E. Glen Weyl


TNIT Seminar, 2010


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

  • Grants of intellectual property (IP) rights, like patents and copyrights, reward inventors for their work, and encourage innovation.
  • IP rights also make markets work less well. For example, consumers pay more for patented goods and get fewer than they would like.
  • 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.
  • 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.
  • 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:

    • Inventions are expected to be highly valuable;
    • It is difficult to guess with precision how valuable an invention will turn out to be;
    • Inventors are more responsive to rewards.
  • The optimality of mixing IP rights and financial prizes might not hold in more complex markets and when innovation is a complicated process.

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